How Does Remortgaging Work?
You’ve probably heard of remortgaging but wondering how it works and haven’t completely grasped what it entails.
Remortgaging, in layperson’s terms, is when you want to switch from one mortgage to another, either staying with the same lender or switching to a new one.
A mortgage is a significant financial commitment that might last a long time.
Even if you put in a lot of effort to get a good deal, it may not always be the best one for you, or you may discover that a once-beneficial agreement no longer provides good value.
If you aren’t getting the best price on your mortgage, it may be time to look into remortgaging.
A remortgage can help you save a lot of money while also giving you more financial flexibility.
However, before you begin, it’s critical that you have a thorough understanding of what it comprises.
This guide will summarise the remortgaging process and provide important tips on how and when to begin.
As experts in our field, we discuss the following in this article:
Our dedicated team at EveryInvestor has done hours of research to discover everything you need to know about remortgaging, so you can make an informed decision.
Here’s what we found.
What’s a Remortgage?
Remortgaging is switching your existing mortgage from one lender to another. It’s a completely new mortgage to replace your current one.
In other words, you’ll replace your current property’s financial agreement with a new one.
Note that it’s not the same as taking out a second loan from your current lender.
Rather, it’s a refinancing that could save you money on your monthly mortgage payments, depending on your circumstances.
You might also release equity by using your remortgage to borrow against the value of your home and secure a larger loan.
When Should You Remortgage?
You should consider remortgaging when you’re nearing the end of your initial fixed rate or reduced period and wish to save money.
Also, when the interest rate reverts to the lender’s standard variable rate (SVR), which is typically higher and will cost you more each month. This is normally 2 to 55 years into the mortgage term.
While the prospect of monthly savings is a typical motivator, there are a variety of other reasons and triggers for remortgaging.
These can include everything from broader economic issues to changes in your financial situation, such as:
- Concern about future increases to lock in today’s interest rates.
- To take advantage of a better deal with a lower interest rate.
- To use the equity in your home to fund home improvements or other major expenses.
- To pay off your other debts.
- To take advantage of lower loan-to-value (LTV) offers and better rates.
- To switch to a longer fixed interest period.
- For a shorter fixed-rate or one that fluctuates with interest rates rather than being bound by long fixed rates.
- To switch to a more flexible mortgage that takes your finances into account, such as an offset mortgage, or one that allows you to make overpayments without incurring penalties.
When Shouldn’t You Remortgage?
You shouldn’t remortgage if your financial condition has worsened since, or the value of your home has decreased. You may find it difficult to get lower remortgage rates.
Remortgaging may be tough if your income, or your credit score, has decreased since you received the initial loan amount.
This is because a new lender will analyse your affordability when you apply for refinancing.
And lenders must adhere to rigorous guidelines when considering whether to lend money.
Lenders are also hesitant to offer mortgage terms to customers over the age of 55. But, that’s where equity release products come into play.
It’s also worth noting that not all mortgages are transferable to a new home. So, if you’re planning to move soon, see if your remortgage can follow you.
Early Repayment Charges
You’ll probably have to pay an early repayment charge if you remortgage before your existing arrangement expires and during the lender’s tie-in period.
This is a percentage of the remaining mortgage debt that typically decreases over time, implying that the longer you leave, the less you pay.
Because this can cost hundreds of pounds, it’s a good idea to read your current provider’s conditions to understand their fees and what you’d have to pay to leave at this point.
If you just have a little mortgage to pay off, you may find that certain lenders have a minimum loan amount that they will accept as a remortgage, which is usually £25,000.
What Are the Benefits of Remortgaging?
The primary benefits of remortgaging is the potential for cost savings.
Because a mortgage is such a large financial commitment, remortgaging to a lower-interest rate agreement can save thousands of pounds.
Another great advantage of remortgaging is that it can help you borrow money.
If you’re having trouble getting a loan approved, you might utilise the higher worth of your property to gain a larger mortgage.
You could also use the extra cash from a remortgage to do alternations or improvements to your house that will boost its worth even more.
Getting Prepared to Remortgage
If you want to remortgage, there are a few things you should do and consider in order to receive the best price for you and your house.
We’ll go through some things you should think about before and during the application process in this section.
Look Out for Exit or Repayment Fees
Depending on your current mortgage commitments, you may be required to pay an Early Repayment Charge (ERC) unless you’re at the conclusion of an existing mortgage contract.
If you don’t see an ERC on your papers, contact your mortgage provider for more information.
You should also consider these fees when shopping for a new mortgage.
What Do You Need From Your Next Mortgage?
The lowest interest rate may not always be the best option, depending on your specific position and needs.
For example, you may find that a more flexible mortgage with a higher interest rate that permits you to quit the mortgage quickly is preferable for you.
If you’re unsure, go to a mortgage professional to learn more about your alternatives.
Check Your Credit Score
Because the lender will do a credit check to analyse your situation, it’s a good idea to review your credit score data before completing your mortgage application.
You’ll want to ensure there are no errors in your credit history and to see if there are any quick wins that could assist raise your score.
Find Out How Much You Could Borrow
If you opt to remortgage, the amount you can borrow will be determined by your personal circumstances and property-related considerations.
A lender will want to know that you will make the payments on your new contract, just like when you first applied for a mortgage.
You’ll have to supply details about your own income, and the income of any remortgaging partners.
The value of your home and the amount you’ve paid toward your mortgage (which is used to determine LTV) will both influence how much a bank will lend you.
Want to Increase the Value of Your Home?
Increasing the value of your home is one strategy to improve the amount you can refinance for.
You can often accomplish this by making simple house renovations that don’t cost a fortune.
Having your home appraised after you do these renovations should cause a higher value.
Keep in mind, though, that mortgage lenders will verify your home assessment, so any price you claim for your home must be realistic in order to support your application.
How Remortgaging Works
A lender uses your equity, or the amount of your home that you own, as a security against your new mortgage when you remortgage.
If your current interest rates have risen or the value of your home has increased since you purchased it, a remortgage can often result in a lower monthly repayment rate.
All remortgages settle your existing mortgage debt and provide you with a new one. One will cover your previous debt while the other will provide you with a larger loan.
Thinking of one as a renewal and the other as a refinance is a way to distinguish between the 2 types of remortgages:
- Renewal is when you utilise a remortgage to replace your existing mortgage, usually to receive a higher monthly repayment rate.
- Refinance is when you use a remortgage to release equity from your home’s worth in order to acquire a larger loan. You’ll still pay off your present mortgage and get extra money, but you’ll owe more money in the long run.
Find Out What Your Property Is Worth
Your new mortgage lender will need to know the value of your present home.
You could get an estimate of value by using internet valuation tools or by requesting an appraisal from an estate agent (some estate agents may charge for this service).
Check How Much Is Left to Pay
Check your most recent mortgage statement to determine how much you still owe on your existing loan.
The lender will use this as a guide to determine the amount of money you’ll need to borrow for your next mortgage.
Apply for an Agreement in Principle (AIP)
After you’ve reviewed mortgages and selected the one that’s appropriate for you, you can fill out a mortgage AIP to see how much a lender will give you based on your remortgage needs.
Compare Remortgage Rates & Deals
Simply enter a few data into our mortgage calculator to get an estimate of your monthly payments.
Check All Remortgage Costs
Consider any additional charges that may be involved with the refinance procedure while assessing all remortgage options:
- Interest rates vs. product charge – Consider the total refinancing costs, such as the difference between a higher interest rate without a product fee and a lower interest rate with a product fee, for example.
- The valuation charge is used to certify the property’s worth. The price will vary depending on the property’s worth.
- If you decide to engage a broker to help you refinance, they should tell you if they charge a fee or if the service is free.
Apply for Your Mortgage
You may be ready to apply for your remortgage now that you have an AIP.
A few documents will be required, including evidence of identification, proof of income, financial conditions (loans or credit commitments), and current mortgage information.
Last Step for Completing a Remortgage
The lender will conduct several checks to confirm your present circumstances and will arrange for the property to be valued in order to approve the remortgage package.
How to Find Remortgage Deals
A financial services provider can help you find and compare remortgaging deals from different lenders.
How Long Does a Remortgage Take?
A remortgage transaction usually takes 4-8 weeks to complete. However, there are several variables to consider, and depending on your circumstances, it may take longer.
Depending on whether you stay with your present lender or switch to a new one, remortgaging can take a different amount of time.
Switching products with the same company is easier and takes less time because they don’t need to verify your credit history and already have all of your information on file.
To get you registered for their product, a new lender will need to do a credit check, analyse your application for flaws, and handle all the legal paperwork. This procedure could take up to two months.
With this in mind, we recommend giving yourself plenty of time to conduct research and compare options.
If you have a specific date in mind for remortgaging, begin the process at least three months ahead of time.
What Remortgage Costs Are There?
Remortgage Costs are pretty standard across most lenders, besides the interest rates and broker charge you’ll have to pay on your new remortgage deal:
- Early repayment penalty: This is usually between 3% and 5% of your mortgage balance.
- Exit fee: This might range from £50 to £300. This is an administrative cost for closing your mortgage account, commonly known as an account fee.
- Arrangement charge for new lenders: Usually between £1,000 and £1,500. This is the fee charged by your remortgage lender for arranging your new mortgage loan.
- Typical legal fees are roughly £300.
- Fees for valuations are typically between £200 and £300. The remortgage provider may forgo this cost in some situations, but they’ll need to conduct an assessment to determine the suitable mortgage loan amount to give.
Can You Remortgage Early?
You can remortgage early however you may not want to. You’ll probably have to pay early repayment charges and exit fees if you decide to remortgage before the fixed rate ends.
Can You Remortgage With Bad Credit?
Sometimes, you can remortgage with bad credit, but it’s easier to locate good mortgage bargains if you have a strong credit score.
The worse your credit score, the fewer options you’ll have and the more interest and fees you’ll have to pay. It’s possible that you won’t be able to secure a new mortgage at all.
There are, however, negative credit mortgage lenders who specialise in assisting those who cannot get a mortgage from traditional lenders.
If your credit condition is critical, remortgaging with your current lender may be your best alternative, especially if you’ve kept up with your payments and aren’t wanting to make any further adjustments to your mortgage beyond switching to a better one.
Should I Remortgage With the Same Lender or Switch Providers?
Yes, you can refinance with the same lender who is currently servicing your loan. You can also shop about to see if you can find a better offer elsewhere.
The major consideration, though, should be whether it’s wise to stick with the same lender.
The answer to this question depends on your goals for switching from your present mortgage, as the benefits and drawbacks of this decision might have a direct impact.
How Does Remortgaging Work to Release Equity?
When you first got a mortgage, it was based on the current market value of your home. If the value of your home has increased since then, you now have greater equity in it.
This is the amount of money you’d get if you sold the property and paid off all the debts associated with it.
You can liberate cash from a property by selling it, but you can also do it by remortgaging and borrowing against the improved property value, then pocketing the difference.
This means you’ll have higher monthly payments, but you’ll have access to money that was previously locked up in your home — money you could use to pay off high-interest debt or do home improvements.
What Is the Downside of Remortgaging?
Downsides of remortgaging include increasing your debt over a longer period of time which increases your overall costs.
If you cannot keep up with the repayments, the lender can repossess your home, which is used as collateral.
The fees associated with remortgages need to be considered, as they could counter a lower negotiated rate.
Is Remortgaging a Good Idea?
Yes, remortgaging is a good idea. You might save a lot of money by remortgaging to a better arrangement, especially if you’re set to fall into your lender’s regular variable rate.
How remortgaging works is switching your existing mortgage from one lender to another. It’s a completely new mortgage that you can take out to replace your current one.
Remortgaging can save you money in monthly payments and unlock extra cash if you have equity in your property.
Remortgaging is most commonly done by homeowners nearing the end of their lender’s initial fixed rate or reduced period.
There are several reasons you should consider remortgaging and circumstances when you shouldn’t.
If you’re looking into remortgaging, make sure your credit score is good as lenders will look into this as well as affordability before refinancing.
We also recommend have your property valued before looking at your options.
You’ll also want to consider the costs involved in remortgaging and weigh these against the potential saving.
If you’re thinking about remortgaging, don’t wait until the last minute — give yourself three to six months before your current agreement expires to think about your choices and shop around.
A mortgage expert can assist you if you’re not sure if it’s right for you or when to do it.
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