Remortgaging: What is a Remortgage & How Does it Work?
, by Matt Stevens
When you take out a mortgage on a home, you're making a financial commitment that can last for a long time. However, even if you put a lot of work into finding a great mortgage deal, it might not always be the best one for you, and you may find that an agreement that was once beneficial no longer offers good value.
If you're not getting the best deal on your home, then it might be time to explore your remortgaging options. A remortgage can help you to save a lot of money in the long run and give you more financial freedom, but it's important that you have a good understanding of what it entails before you go ahead. This guide aims to give you a good overview of the remortgaging process, as well as giving you essential advice on how to get started.
We will cover:
What is a remortgage?
A remortgage is when you switch from your current mortgage to another product. This doesn't involve moving home, but does mean replacing your financial agreement on the property with another. In most cases, a remortgage is done to get to a better rate or unlock extra funds.
When you sign a mortgage agreement and move in, you aren't locked into the same rate for the entire repayment period. Though you may have an initial tie-in period where there are penalties for switching your mortgage, outside of this you can look for a better deal. So, if you feel your agreement is no longer providing the best value, you can shop around then make the switch over to a completely new product.
Why should I remortgage?
In this section, we'll look at some of the reasons for considering a remortgage and what you should be on the lookout for. Read on to find out more.
It's the end of your initial tie-in period
Fixed rate, tracker, and discount mortgages usually have a period of 2–5 years where you benefit from a lower interest rate, but once this expires, most providers will switch you to their standard variable rate (SVR). The problem is, the SVR tends to be much higher than the rate you were previously on, so you will end up paying more each month.
You can avoid this price hike by remortgaging, and switching to a better deal. It's best to start looking around three months before your current deal comes to an end, to give you plenty of time to find a product and arrange a remortgage. If you don't know your date, check your agreement or contact your provider as soon as possible.
There are better rates available
Even if your initial tie-in period is ongoing, you might want to find a mortgage with a better rate to save money each month.
However, while you could find the product you're looking for, you need to consider any early repayment charges that could eat into any savings you are on course to make. This is especially true if you are still within your initial deal, as these fees can often add up to as much as 2–5% of your outstanding loan.
Your property's LTV has reduced
Has your property's value risen since you first took out a mortgage? Or have you repaid a significant amount of your mortgage over the years? The increased worth of your home and repayment of your mortgage may have improved your loan-to-value ratio (LTV), something that can give you access to lower rates if you were to remortgage.
The LTV ratio is how much mortgage you have in relation to how much your home is worth. It is often given as a percentage, representing how much of the home you have mortgaged, with the portion you own known as equity.
An increase in your home's value can lower your LTV in your favour, as it boosts the amount of equity you own. For example: if your property was originally worth £100,000 and you took out a mortgage of £90,000, you would have an LTV of 90%. However, if your home value increases to £120,000, your equity would increase with this too, giving you a new, lower LTV of 75%.In addition, repaying your mortgage can also increase equity in your home, raising the share of it you own. Using the same example: a £90,000 mortgage on a £100,000 home (90% LTV) could be reduced if you repaid £10,000, so you only owed £80,000 at 80% LTV. Both repaying your mortgage loan and an increased value can work together to lower your LTV ratio.
The higher the LTV, the higher the risk to the lender, which is the reason why a reduced LTV would give you access to lower interest rate mortgages.
Remortgage to release equity
When you've built up equity in your home by paying down your mortgage or thorough an increase in property value (or a combination of both), you may want to release some of it for other purposes. There are quite a few reasons why you may want to access extra money, such as paying for retirement, home improvements, consolidating debts, or buying a new car. One of the ways you can do this is by remortgaging, where you take out a new deal to borrow more money than your current mortgage amount, allowing you to access a cash lump sum.
It should be pointed out that this is essentially a loan using your home as collateral and you will be selling off part of your equity. This will entail borrowing and paying interest on a larger mortgage amount that you had before, so it's worth checking you will be able to still afford repayments.
Let's look at an example: say your home's value is £150,000 and you have £80,000 left on your current mortgage. This means you have £70,000 in equity. If you remortgaged for £100,000, you would 'unlock' £20,000 of equity and receive it as a lump sum.
Think carefully before securing other debts against your property; your property may be repossessed if you do not keep up repayments on your mortgage
There has been an interest rates rise
If you have a non-fixed-rate mortgage, such as a standard variable, tracker, or discount mortgage, then an increase in the Bank of England's base interest rate can mean your mortgage payments are in line for an increase too. This is because they use the base interest rate to calculate how much your repayments should be so, if there is a hike, you will be charged more to reflect this. If this is the case, you may well consider remortgaging to a fixed-rate mortgage to ensure you're protected
This happened most recently when in late 2022 the Bank of England announced a base rate increase from 3% to 3.5%, initiating a remarkable trend. Over the next several months, the rate continued to surge, reaching 5.25% after 14 consecutive increases by September 2023. This sudden and sustained rise triggered significant volatility in the housing market. Currently, there's widespread speculation about whether the current rate will decrease, given its connection to inflation. For more insights on interest rate rises and their correlation with inflation, you can check out our recent post.
You want to switch from an interest-only deal
Though they are more difficult to secure than before the 2008 financial crash, some lenders still offer interest-only mortgages that only require you to pay the interest on your loan each month, rather than loan repayments plus interest. If you've taken out one of these mortgages or have one from before 2008, you may reach a point where you want to switch over to a repayment mortgage instead.
Most lenders don't have a problem with this, and they will let you make the change without having to go through the remortgaging process. However, if you want to start making repayments and get a better deal at the same time, you will most likely have to remortgage. If you still want to keep your repayments at an affordable level, it may be possible to find a new deal over a longer term that will allow for this.
A lender won't allow you to make overpayments
If you come into an increased amount of money, perhaps through a pay rise or an inheritance, you may wish to overpay on your mortgage to make more progress with your repayments. However, it might be the case that your current deal does not allow you to do this or restricts the amount you can overpay.
By remortgaging, you could switch to another deal or provider that allows you to make larger overpayments, reduce your loan amount, and access a lower rate for the future. Just be sure to calculate the cost of doing so, including any exit fees, and compare it to your potential savings.
How does remortgaging work?
Remortgaging is a little bit more than just deciding to switch deals. You will be paying off your current mortgage with the amount you are borrowing from the new mortgage, using your home as the security for the new loan. You will then commence making repayments under the new terms.
Even though you will be applying for a new mortgage, the process is a lot less complex than it was when you first purchased your home. That being said, a remortgage is still something that needs a lot of thought and planning, as it is still a huge financial decision.
Can I remortgage with the same lender?
Yes, you can remortgage with the same lender that provides your current agreement. As we've mentioned, you can also shop around to see if you can find a better deal somewhere else.
However, the real question should be: is it best to stay with the same lender? The answer to this can depend on what you hope to achieve by switching from your current mortgage, as the positives and negatives of this decision can have a direct impact.
Let's take a look at some important considerations you should make when it comes to deciding whether to stay or go:
- Is it worth paying exit or early repayment fees to switch lender? If you are thinking about switching mortgage lender, you should consider whether the payment of any extra fees will outweigh your savings. Some mortgage products have an early repayment fee or extra exit fees built in that could cost you up front.
- Is it worth paying legal fees to switch lender? On top of potential exit fees, you will have to pay extra legal fees for a solicitor to handle the legal requirements of switching provider. This will also eat into any potential savings you aim to make.
- Are any lenders offering incentives to bring the cost of switching down? Sometimes, lenders will offer incentives, like free legal work or valuations, to attract people who are considering a remortgage. It's worth taking these into account, as they can often balance out some of the costs outlined in the previous points.
- Has your credit rating fallen since you applied for a mortgage? You should be aware that a new lender will need to carry out a credit check on your application, whereas your current one probably won't. If you think your credit score may be worse now than when you applied, you may be turned down, which will also be recorded on your credit history.
- Have you become self-employed since you applied for a mortgage? The fact that a new provider will need to carry out a credit check can also affect you if you have become self-employed since your original application. You may be required to provide proof of your earnings in place of a salary, which can require more legwork on your behalf.
- Are you looking for more flexibility? If part of the reason you are looking for a new mortgage is because you want to pay less or access more attractive features, then it's worth remembering that staying put will limit you to your current lender's range of products only. Providers are trying to gain customers all the time, so there are often attractive deals to be had if you will be a new customer. Also, if your current provider doesn’t offer a lot of features, such as the ability to overpay on your repayments, a new provider just might.
- Do you have a high level of equity in your home and/or a great credit history? Should you have either or both of these in your favour, you may be able to secure a much lower rate on a new deal. By staying put, you may be limiting yourself and missing out on a better deal from another provider.
Are there fees for remortgaging?
In addition to the new repayments you will need to make after the remortgage process, there are some costs to consider, such as an early repayment charge on your current mortgage, potential set-up fees for the new deal, valuation fees, and legal fees.
It's worth taking these into account, as the total cost may outweigh any savings, if that is the goal of the remortgage. Let's take a closer look at some of these fees.
Early repayment fee
Who is paid? Your current lender.
When is it paid? On exit of an initial tie-in period.
An early repayment fee will be payable if you decide to remortgage during an initial tie-in period, which can often span the first 2–5 years. This is designed to recoup some of the interest that your current lender will be losing out on, and it's typically calculated as a percentage of the outstanding amount left on your mortgage.
As this percentage can amount to quite a large fee, it can be difficult to pay upfront. It is usually possible to take out a larger mortgage with your new lender to cover any early repayment costs, though this could increase the LTV on your home. To avoid paying this fee, you will need to remortgage once it your tie-in period has expired, so be sure to have that date in mind when you’re planning ahead.
Exit fee
Who is paid? Your current lender.
When is it paid? At end of mortgage.
This fee covers the act of your current lender sending your title deeds to your solicitor, and is often referred to as a 'deeds release fee' or 'admin charge'. You can pay this upfront or when you leave your current mortgage arrangement. Though not all lenders will charge this, the exact amount should be defined in the paperwork for your mortgage if they do. Make sure you check this to verify the fee you are being charged.
Mortgage arrangement fee
Who is paid? Your new lender.
When is it paid? Upfront with application or added to mortgage amount.
This is the fee that your new lender will charge you for taking out a new mortgage with them. They are a fixture of all mortgages, and you will probably be presented with a variety of choices when browsing the product market.
You will often find the size of the fee correlates to the interest rate of the deal: high fees are paired with low rates, and low fees carry higher rates. Which one suits you best usually depends on the size of the loan you are taking out, as a larger loan can be less costly with a lower rate in the long run. You will be presented with the choice of paying this upfront or adding it onto your loan.
Booking fee
Who is paid? Your new lender.
When is it paid? Upfront on application for a mortgage.
This fee applies to fixed-rate, tracker, and discount mortgages only, and is charged to secure your deal when you apply.
Valuation fee
Who is paid? Your new lender.
When is it paid? Upfront on application for mortgage.
Your lender needs to undertake a comprehensive valuation of your property, so they know what it's worth for their records and for assessing your application. This is a fee that you may have to pay, though the vast majority of lenders now provide a valuation service as part of the package.
Conveyancing fee
Who is paid? Your solicitor.
When is it paid? During application for a mortgage.
To remove your current lender's interest from your home and register it to your new mortgage provider, a solicitor must carry out legal work. Like the valuation fee, many lenders now provide this service for free, so there is a good chance you won't need to pay anything towards it.
How much can I remortgage my house for?
If you decide to remortgage, how much you are able to borrow will depend on your personal circumstances, as well as factors relating to your property. As a general rule, most lenders tend not to offer over 95% LTV remortgages, though there are some specialist products or lenders on the market that might.
Much like when you first applied for a mortgage, a lender will want to know that you will be able to make the repayments on your new deal, and they will not lend to someone who is applying for a deal that they can't afford. Your house's value and how much you have paid towards your mortgage (used to calculate the LTV) will also affect how much a bank is willing to lend you.
One way to increase the amount you can remortgage for is to get your house valued for more, which can often be achieved by carrying out basic home improvements that don't cost the earth. Bear in mind that mortgage providers verify your home valuation, so any price will need to be realistic to support your application.
When can I remortgage?
You can usually remortgage at any time, but you should carefully consider when is the right moment for you. However, if you've been in your home for less than six months, you will probably have some trouble negotiating a new deal with your current provider or another, though this can depend on what their policy dictates.
Choosing the right time to remortgage is a very important decision. For many people, this is when their initial tie-in period is coming to an end in the first 2–5 years of their term, and a switch to a standard variable rate is looming. Getting a better deal in this situation can often save a lot of money in the years to come.
At the same time, you might decide the time is right to remortgage and release equity for your own use. Retirement and home improvements to boost property value are two common reasons for accessing the equity in your home, and a welcome cash lump sum can ease the burden on your other finances. These are just two examples of how timing your remortgage can be key.
Whatever your reason for remortgaging, it's important that you don't take the decision lightly. The process can have a positive effect on your life if timed right, but it can cause issues if you do it at the wrong time, too. For example, if you chose to remortgage ahead of a period of uncertainty for your personal finances, you would need to make sure that you would be able to afford the repayments.
It's always best to take financial advice before making such a big commitment. Here at The Mortgage Genie, we can help you to identify when is the best time to go ahead if you are considering a switch in the future. Our remortgage advice team can talk you through the process, taking into account your personal circumstances and goals, then help you get the ball rolling when the moment comes.
How long does it take to remortgage?
The length of time it can take to remortgage can differ depending on whether you are staying with your current lender or switching to a new one. Switching product with the same company is a little bit simpler and only takes up to a month, as they don't need to check your credit history and will have all of your information on file.
On the other hand, a new lender will need to carry out a credit check, assess your application from scratch, and carry out all the legal work to get you registered to their own product. This process can take anywhere up to two months.
With this in mind, we recommend that you allow plenty of time for research and comparison. If you have a particular date in mind that you'd like to be remortgaged by, it's best to start the process around three months in advance.
How many times can you remortgage?
There isn't a set limit to how many times you can remortgage. If you aren't locked into an agreement with excessive fees for switching, it can be beneficial to review your mortgage on an annual basis to make sure that you are getting the very best deal for your finances. New products are added to the market reguglarly, so it really is worth keeping an eye out for one that you could potentially move to and save money.
It can be very helpful to set a date in your diary or calendar to remind you when you should review your current mortgage. As we've mentioned, it's best to start looking around three months in advance.
How to apply for a mortgage
Now that you are familiar with what remortgaging is and how it works, you can start to think about getting your own application started. However, there are a few things that you still need to do and think about in order to get the right deal for your home.
In this section, we will look at some of the considerations you need to make before and during the application process. Read on to find out how to kick off your remortgage.
Check your credit score
One of the ways that a mortgage provider will judge any application for a remortgage is on your credit history, so if your score has suffered since you were last accepted for a mortgage, there's a chance you will be turned down. What's more, a rejected application will be recorded on your file and can count against future applications.
Therefore, it's best to get hold of your credit report in advance to see how you're doing. If your score is lower than you thought, it might be worth holding off your remortgage until you've improved it. You should be able to see what is counting against you on the report, which can help you to address any issues. It's best to access your credit report through either Experian or Equifax, the UK's biggest agencies, as a mortgage provider is likely to use one of these. This way, you can see the exact information they will be judging your application by.
Find out what your current lender can offer you
Before you start looking around the market for better offers, be sure to find out what your current lender can offer you. It's good to see what type of deal you could switch to with a current provider, as you can then use this as a benchmark when you are working out if it's worth switching.
Know your property's current value before you apply
To be able to look at the deals on the market, you will need to find out roughly what your property is worth. Any provider will carry out a valuation, but you will need to have a figure in mind for your initial pricing up. Plus, having a rough idea at hand can give you an idea whether a lender's valuation is too high or too low when you apply.
The easiest way to get an idea of how much your home is worth is by using an estimate tool, such as this one from Zoopla. You can also use the government's UK House Price Index to find out current and historical average property prices in your area.
Speak to your provider to find out how much you owe
If you are thinking about applying for a remortgage with a new lender, you will need to find out exactly how much you owe so you don’t under- or overestimate your new application. This will allow you to work out your property's LTV, too.
The best way to find out how much you owe is to speak to your current provider and ask them how much you will need to pay to clear your mortgage on your intended switch date.
Know your property's LTV before you apply
Once you have your property's approximate value and you know how much you have remaining on your mortgage, you can then work out the loan-to-value ratio, which will determine what kind of rates you will be able to apply for.
This LTV is simple to work out: simply divide the amount you owe on your mortgage by your home's current value, then multiply that figure by 100 to get a percentage. So, for example: £90,000 remaining to pay divided by a £160,000 current value, then multiplied by 100, gives an LTV of 56.25%.
With your LTV figure, you will then be able to research deals on the market knowing the kind of rates you will be eligible for. Generally speaking, the lower your LTV, the lower the rates you will be able to access.
Think about applying early to guarantee a good rate
If you're planning ahead and see a deal with an attractive rate, you may be able to apply early to secure it and make sure you don't miss out. Some lenders allow borrowers to agree a remortgage deal up to six months in advance, which can be particularly useful if you're locked into an initial tie-in period and know what date you can switch over.
Explore your options, but don't overdo it
As we've just mentioned, you can often apply and reserve a good remortgage deal in advance. However, if you do apply early, that doesn't mean that you shouldn't keep looking at your options through the months in-between. If you find a superior rate elsewhere, don't be afraid to drop your early application and move to a different lender.
If you adopt this approach, you do need to bear in mind that any upfront fees you have paid to start an early application will not be refunded if you decide to drop out. Not all lenders charge these, but if they do, you'll need to weigh up whether it's worth it. You should also make sure that you don't apply to too many providers in a short space of time, as they will each carry out a credit check that will be recorded on your history.
Playing the field can be hard work and time-consuming, but often pays off with a better deal. The easiest way to find the best remortgage around is to get a mortgage broker to do the hard work for you. At The Mortgage Genie, our team of remortgaging experts will dedicate themselves to doing the difficult negotiations, as well as supporting your application from start to finish.
Get your paperwork together
You may recall that when you first applied for the mortgage, your lender wanted to see a lot of paperwork to process your application. Unfortunately, the same is true for a remortgage, so you will need to spend some time getting everything in order beforehand.
You will need to get:
- Last three months' bank statements
- Last three months' pay slips
- Any proof of bonuses or commission
- Latest P60 tax form
- ID (usually a passport is required)
- A proof of address (credit card or utility bills)
Remember that mortgage providers will want to see original copies of paperwork, so if you have paperless banking or billing set up, you will need to source them. If you need extra help, The Mortgage Genie's remortgage advice team will be able to guide you through the process and make sure you apply with the right evidence.
Prepare in advance if you're self-employed
If you're self-employed, there's a good chance you've experienced the extra complications that a credit application can entail. Lenders can be fussier if you need to prove your own income, and usually request extra evidence to back up your application.
It's worth getting these organised before you start applying to avoid any last-minute rushing around. Preferably, you will need to show 2–3 years of business accounts signed off by an accountant, or failing that, 2–3 years of tax returns. You will also need the paperwork discussed in the last point.
Consider using a mortgage broker
It can be difficult to tackle finding a remortgage on your own. Whether you are too busy to research, you find the mortgage market overwhelming, or finances aren't your strong point, it's important to know that there is help out there.
A mortgage broker can provide you with tailored financial advice, as well as helping you get your application in order. Not only that, but they will have a deep knowledge and experience of the market, and might be able to arrange deals not available to other consumers.
Here at The Mortgage Genie, we specialise in offering you valuable and transparent remortgaging advice to help find a deal that is just right for your personal circumstances. We can make the whole process as simple as possible, managing each part of your application and liaising with your chosen provider. We've helped many people get a better deal on their home, and we'd like to help you too.
We hope this guide has helped you understand what a remortgage is and how they work, as well as how you can go about applying for one. If you have any questions about your own remortgage or anything covered here, feel free to give us a call on 033 33 44 33 72 or get in touch with us.
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