What is a Remortgage & How Does it Work?
Taking out a mortgage is a large financial commitment which can last for a long time. Even if you put in a lot of work to find a great deal, it might not always be the best one for you, or you might find that an agreement which was once beneficial, no longer offers good value.
If you’re not getting the best deal on your mortgage, then it might be time to start considering your remortgage options. A remortgage can save you a lot of money and can give you more financial freedom. However, it is important that you have a good understanding of what it entails before you start the ball rolling.
This guide will give you a good overview of what it means to remortgage, the remortgaging process, as well as giving you essential advice on how and when to get started.
We will cover:
What is a Remortgage?
Remortgaging means transitioning your existing mortgage to a new one without moving homes. This involves replacing your current financial arrangement with a different product, often to secure a better rate or access additional funds. Unlike borrowing more from your current lender, remortgaging typically aims to avoid higher rates, like the standard variable rate (SVR), after your initial fixed term.Why Should I Remortgage? Is it Time to Remortgage?
1. End of Initial Tie-in Period
Fixed rate, tracker, and discount mortgages typically offer lower rates for 2-5 years. After this period, most providers switch you to their SVR, which is often higher, resulting in increased monthly payments. To avoid this, start searching for a better deal three months before your current deal ends. If you’re unsure when your tie-in period ends, we can check with your mortgage provider or you can refer to your original agreement.
2. Better Rates Available
Even if your initial tie-in period is ongoing, it’s wise to explore the mortgage market for better rates. Consider any early repayment charges, which can be 1-5% of your outstanding loan. Checking your original agreement or consulting with your lender can help determine these fees. After your tie-in period, switching from your provider’s SVR can save you money over time.
3. Reduced Loan-to-Value (LTV)
If your property’s value has risen or you’ve repaid a significant portion of your mortgage, your LTV ratio may have improved, giving you access to lower rates. LTV is the amount of your mortgage relative to your property’s value, often expressed as a percentage. Lowering your LTV by repaying your mortgage or through an increase in property value can secure better rates when remortgaging.
4. Release Equity
You can remortgage to release equity built up in your home for various purposes, such as retirement, home improvements, debt consolidation, or buying a new car. This involves taking out a new mortgage deal to borrow more than your current mortgage amount, giving you a cash lump sum. However, this means borrowing and paying interest on a larger amount, so ensure you can afford the increased repayments.
5. Interest Rate Rise
If you have a non-fixed-rate mortgage (e.g., standard variable, tracker, or discount mortgage), an increase in the Bank of England’s base interest rate can lead to higher payments. Remortgaging to a fixed-rate mortgage can protect you from such increases.
6. Switch from an Interest-Only Deal
Interest-only mortgages require only interest payments each month, not loan repayments. If you want to switch to a repayment mortgage, especially in light of financial changes due to Covid-19, consult your provider for better deals. Some lenders allow switching without remortgaging, but if you want to change to a repayment mortgage and get a better deal, remortgaging might be necessary.
7. Overpayments Not Allowed
If your current mortgage deal doesn’t allow overpayments or restricts the amount you can overpay, consider remortgaging to a deal that permits larger overpayments. This can reduce your loan amount and potentially access a lower rate in the future. Always calculate the cost of switching, including exit fees, and compare this to your potential savings.
When Shouldn’t You Remortgage?
1. Small Mortgage Debt
If your remaining mortgage balance is low, switching lenders may not be beneficial due to high fees relative to your savings. Look for low or no-fee rates, but often, sticking with a higher interest rate is more cost-effective.
2. Changed Financial Circumstances
If your financial situation has changed since you took out your current mortgage (e.g., job loss or becoming self-employed), lenders may not approve a new loan. Strict lending criteria require proof of income, which might make remortgaging difficult.
3. Decreased Home Value
A drop in your home's value can reduce your equity, making remortgaging less favourable. If your debt now represents a larger proportion of your home's value or you're in negative equity, it’s often best to stay put, make overpayments if possible, and wait for market conditions to improve.
4. Low Equity
If you need to borrow more than 90% of your property’s value, finding a better rate can be challenging. While higher LTV mortgages are more competitive now, it’s essential to compare options to determine if remortgaging is worthwhile.
5. Recent Credit Issues
Lenders are increasingly cautious and require detailed information on your outgoings and a clean repayment history. Even one recent missed payment can negatively impact your chances of securing a better mortgage rate, particularly if you have bad credit.
How Does Remortgaging Work?
Remortgaging involves replacing your current mortgage with a new one, using your home as collateral. This process requires paying off your existing mortgage with the funds borrowed from the new loan and adhering to the new repayment terms.
Although simpler than the initial home purchase, remortgaging remains a significant financial decision that necessitates careful consideration and planning.
How does the Remortgage Process Work?
1. Get an Agreement in Principle (AIP)
Begin by getting an AIP, which indicates if a lender might offer you the amount you need without a full credit check. Most lenders can provide an AIP within minutes. However, note that an AIP does not guarantee remortgage approval.
2. Consider All Costs
Application Fee: Charge to set up your new mortgage.
Valuation Fee: Confirms the value of your property.
Solicitor’s Fee: Manages the mortgage transfer.
Exit Fees: Check for any fees from your current provider, including early repayment charges.
3. Apply for Your New Mortgage
With an AIP and an understanding of the costs, apply for your remortgage. You’ll need to provide details of your finances, personal circumstances, and current mortgage. Having all necessary documents ready can streamline the process.
4. Complete Your Remortgage
Your new lender will assess your situation, perform a credit check, and possibly value your property. A solicitor will handle the transfer. Some lenders offer free legal help. Once all checks are complete and the transfer is handled, you’ll have secured a better deal and saved money.
Can I Remortgage With The Same Lender?
Yes, you can remortgage with your current lender, but the key question is whether it's the best option for you. Here are important considerations to help you decide:
Exit or Early Repayment Fees: Evaluate if the savings from switching outweigh any exit or early repayment fees, as these fees can sometimes negate the benefits of switching.
Legal Fees: Switching lenders may involve legal fees for a solicitor to handle the transfer. Some lenders offer free legal services as an incentive, which can reduce overall costs.
Lender Incentives: Look for lenders offering incentives such as free legal work or valuations. These can help offset switching costs.
Credit Rating Changes: A new lender will perform a credit check, whereas your current lender might not. If your credit rating has dropped, it could impact your ability to secure a new mortgage.
Self-Employment Status: If you’ve become self-employed since your original mortgage, a new lender will require proof of income, which can be more complex than providing a salary.
Flexibility Needs: If you're seeking more attractive features like the ability to overpay, a new lender might offer better options than your current provider.
Equity and Credit History: High equity and a strong credit history can make you appealing to new lenders, potentially securing you a better rate. Staying with your current lender might limit you to less favourable terms.
Are There Fees for Remortgaging?
Yes, remortgaging involves several fees beyond your new repayments. These costs can sometimes outweigh the savings, so it’s essential to consider them carefully. Here are the main fees and when they are due:
Early Repayment Fee
Who pays: Your current lender
When paid: Upon exiting an initial tie-in period
Details: Typically charged if you remortgage during the initial 2-5 years, calculated as a percentage of your outstanding mortgage. It can be large, but you might cover it by increasing your new mortgage, potentially raising your LTV.
Exit Fee
Who pays: Your current lender
When paid: At the end of your mortgage
Details: Covers the cost of sending your title deeds to your solicitor. Not all lenders charge this, and the amount should be specified in your mortgage paperwork.
Mortgage Arrangement Fee
Who pays: Your new lender
When paid: Upfront or added to the mortgage amount
Details: Charged for taking out a new mortgage. High fees usually accompany lower rates and vice versa. You can pay this fee upfront or add it to your loan.
Booking Fee
Who pays: Your new lender
When paid: Upfront upon mortgage application
Details: Applies to fixed-rate, tracker, and discount mortgages to secure your deal when you apply.
Valuation Fee
Who pays: Your new lender
When paid: Upfront upon mortgage application
Details: Covers the cost of valuing your property. Many lenders now include this service in their packages, so you might not need to pay this fee.
Conveyancing Fee
Who pays: Your solicitor
When paid: During mortgage application
Details: Covers the legal work to transfer your mortgage from your current lender to the new one. Many lenders offer this service for free.
How Much Can I Remortgage My House for?
The amount you can borrow when remortgaging depends on your personal circumstances and property factors. Most lenders typically offer up to 95% LTV, though some specialist products and lenders might go higher.
Just like with your initial mortgage, lenders will assess your ability to make repayments. This means you'll need to provide information about your income, as well as any partner’s income if applicable.
Your house's value and how much you've already paid towards your mortgage will also impact the amount you can borrow. One way to increase this amount is by improving your home's value through cost-effective renovations. After these improvements, getting a new valuation can boost your home's worth. However, be realistic about the increased value, as mortgage providers will verify the valuation.
Use our mortgage calculator to see how much you could borrow.
When Can I Remortgage?
Choosing the right time to remortgage is crucial since your mortgage is one of your most significant financial commitments. You can usually remortgage at any time, but if you've been in your home for less than six months, you may have trouble negotiating a new deal with your current provider or a new lender, depending on their policies.
Many people find the best time to remortgage is when their initial tie-in period is ending, typically within the first 2-5 years. This is when your rate is about to switch to a standard rate, and securing a better deal can save you money in the long run. You might also choose to remortgage to release equity for purposes such as retirement funds or home improvements.
Timing your remortgage is essential as it can positively impact your finances if done correctly. However, remortgaging at the wrong time, such as before a period of financial uncertainty, can lead to difficulties in managing repayments.
How Long Does it Take to Remortgage?
The time it takes to remortgage varies based on whether you're staying with your current lender or switching to a new one. If you stay with your current lender, the process is simpler and usually takes up to a month, as they already have your information and don’t need to check your credit history.
Switching to a new lender is more involved. The new lender needs to conduct a credit check, assess your application, and complete all the legal work to register your mortgage. This can take up to two months.
Given these timelines, it's wise to start the remortgaging process about three months before you want to complete it. This allows ample time for research and comparison to ensure you find the best deal.
How Many Times Can You Remortgage?
There is no set limit to how many times you can remortgage. If you’re not locked into an agreement with excessive switching fees, it can be beneficial to review your mortgage annually to ensure you’re getting the best deal.
New products are regularly added to the market, so it’s worth staying informed about potential savings. Setting a reminder to review your mortgage annually, starting about three months in advance, can help you stay on top of your options.
How Do You Qualify for a Remortgage?
Qualifying for a remortgage involves several considerations beyond simply finding a better deal. Lenders assess various factors to determine the risks associated with remortgage applicants.
Income
Your income is a key factor in qualifying for a remortgage. Lenders compare your income to your mortgage debt, typically aiming for a debt-to-income ratio of 38% or lower. However, some lenders may accept higher ratios. Consider reducing debts if your ratio is high.
Loan-to-Value
Most lenders prefer applicants with less than 80% LTV, though exceptions exist. A lower LTV can improve your chances of qualifying for a remortgage. Refer to our earlier section on LTVs for more details.
Credit Score
A good credit score is crucial for qualifying for an attractive remortgage deal. While lenders may offer products to applicants with less-than-perfect scores, these often come with higher interest rates.
Lenders consider these factors, along with your personal circumstances, when deciding if you qualify for a remortgage.
How to Get Ready to Remortgage
Now that you understand what remortgaging entails, it's time to prepare for your application. Here are some key steps to consider:
1. Check Your Credit Score
Review your credit report to ensure it's in good shape. Address any issues that may affect your eligibility for a remortgage. You can use our free credit check tool (£14.99 per month after the free 30-day trial) to help spot potential mistakes and fraudulent activity so that you can deal with any problems quickly. The trial and subscription can be cancelled at any time.
2. Explore Options with Your Current Lender
Before searching the market, see what your current lender can offer. Use their deals as a benchmark for comparison.
3. Know Your Property's Value
Determine the approximate value of your property to guide your remortgage search. Use online tools or government indices for insights.
4. Assess Your Mortgage Debt
Find out the exact amount you owe on your current mortgage to calculate your LTV ratio accurately.
5. Understand Your LTV
Calculate your LTV ratio to gauge the types of rates you qualify for. Lower LTVs typically lead to better rates.
6. Consider Early Application
If you spot an attractive deal, you may apply early to secure it. Some lenders allow applications up to six months in advance.
7. Explore Options Wisely
While you can reserve a deal early, continue researching other options. Be cautious about upfront fees and credit checks.
8. Gather Necessary Documents
Prepare essential paperwork, including bank statements, pay slips, tax forms, and identification, for your application.
9. Prepare if Self-Employed
If self-employed, organise additional evidence of income, such as business accounts or tax returns, well in advance.
Preparing thoroughly and staying organised can streamline the remortgage process and increase your chances of securing the best deal.
How Much You Could Save by Remortgaging
Remortgaging offers significant financial benefits. By securing a better deal, you can reduce interest rates and even access equity through a lump sum. The potential savings from remortgaging are substantial. Explore our calculator to estimate your potential savings.
For landlords, understanding buy-to-let remortgages is essential. Unlike residential remortgages, which cater to property owners residing in their homes, buy-to-let remortgages are tailored for rental properties.
Consider a Mortgage Broker
Navigating the remortgage process alone can be daunting. Whether due to time constraints, feeling overwhelmed by the market, or lacking financial expertise, it's essential to know that assistance is available. A mortgage broker offers tailored financial guidance and streamlines your application. With their deep market knowledge, they can secure deals unavailable to individual consumers.
Seeking financial advice before committing is advisable. At The Mortgage Genie, our experienced team helps identify the optimal time for your remortgage, considering your unique circumstances and goals. We simplify the process, managing every step and liaising with your chosen provider.
Fill out our hassle-free form for personalised advice and quotes. We aim to demystify the remortgaging process. For queries or assistance, contact us at 01915809890 or via live chat.
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.