Whether your existing mortgage deal is coming to end or you want to borrow money against your current equity, you’ll need to take out a new mortgage or as it’s known, remortgage.
Knowing when to remortgage and if you’re making the right decision involves some research and planning. That said, around a third of all home loans made in the UK are remortgages and so it’s a pretty common process.
When should you remortgage?
If your introductory mortgage rate is coming to an end, you’re likely wondering when to remortgage and if you should. Being on the right mortgage deal has many advantages from saving money to paying the loan back early.
Most mortgages deals typically last between two and five years. Once the offer expires, your mortgage rate will revert to the lender’s standard variable rate. This will always be higher than your deal and can mean you paying over the odds.
It’s a good idea to start looking at remortgaging deals around three months before your current one ends. This way, you’ll have plenty of time to research your options as well as complete the paperwork in time to ensure your new deal starts as your last one ends.
Why should you remortgage?
As we’ve covered when to remortgage, the next logical question is why? There are many situations where it makes sense to remortgage, especially if the market has changed since you took out your original mortgage.
It’s worth considering how the Bank of England’s (BoE) interest rate has changed since you took out your fixed-rate deal. Most lenders use the BoE interest rate to sets and adjust their standard variable rates.
If this rate has dropped since you took out your fixed-rate deal, then it might not be worth remortgage unless you can find a better variable rate or tracker deal elsewhere.
However, if the bank rate has risen during this period, then it’s worth looking for another fixed-rate deal as you probably can remortgage onto an equally attractive offer.
If you’re already on a discounted variable rate but there has been a dramatic rise in the underlying BoE interest rates, then you probably won’t feel the shock as your rate will have risen over that period. However, it still would be worth considering a fixed-rate deal.
Another reason to remortgage is your property’s value has increased and by a lot. You might find your in a lower loan-to-value band and therefore eligible for much lower rates. Even if you end up paying some fees, your new deal could save you hundreds, if not thousands of pounds over the lifetime of the mortgage.
Your current deal doesn’t allow overpayment
If you’ve had a substantial pay rise or inherited some money, it could be a wise decision to pay down your mortgage. However, you might be locked into a deal where you can only pay off a small chunk each year on to of your regular payments.
Remortgaging will enable you to reduce the size of your home loan and could potentially drive down the interest rate. Just be aware that you might end up facing early repayment charges or exit fees, which could wipe out any benefit.
You’d like to borrow more
Whether you’re looking to buy a second home, for home improvements or consolidate your existing debts, you can remortgage to release equity. This could be cheaper and easier than taking out a personal loan.
Of course, you’ll need to factor in fees and may even need to provide proof, especially if you’re borrowing a large sum for home improvements or to consolidate debts. It’s unlikely you’ll be able to remortgage to start a new business or invest in your current one.
Why shouldn’t you remortgage?
There actually many situations where remortgaging doesn’t make any sense and could cost more in the long run.
Your current interest rate is fantastic
For some homeowners their current deal is fantastic and it’s unlikely that switching would provide any benefits. You might be able to negotiate a mortgage rate that more favourable, however, this could be difficult.
Of course, the longer you’ve had your current deal, the more likely remortgage makes sense.
You’ve had issues with credit
Before the credit crunch, borrowing money was relatively easy. Sadly, that not the case anymore and the regulator, the Financial Conduct Authority (FCA), now requires lenders to be more prudent.
Your lender will check your application with a fine toothcomb to ensure that the mortgage is affordable both now and should rates rise. Even the smallest red flag, such as a missed mobile phone bill or loan payment could hamper your chances of remortgaging.
Change in your circumstances
If you’ve, for example, become self-employed or stopped working since you took out your current mortgage then it could be difficult to remortgage.
Stricter mortgage rules came into force in April 2014. These changes could mean your less likely to be approved for a mortgage as you no longer fit their criteria. You may have to stay with your current lender.
Fall in your home’s value
If you started with a 10% deposit, meaning you borrowed 90%, a small change in your property’s value could mean you’re in negative equity or close.
Being in negative equity is only a problem if you plan to move within the next few years. You can always wait for your local market to rise and make overpayments as and when you can afford to, just as long as you won’t be charged fees.
Remaining mortgage debt is small
As you get closer to paying off your mortgage, the benefits of switching diminish. For example, some lenders won’t offer mortgages below £25,000 or will charge exorbitant arrangement fees.
You’ll likely be better off remaining on a slightly higher interest rate than trying to switch to save a few hundred pounds.
High early repayment charges
Sometimes moving deal will cost you more than staying put. Even though the new offer is highly attractive.
If you will be stung by excessive repayment charge, then it’s worth asking your current lender if you could switch to another of their products and pay a reduced early repayment charge.
This new deal is unlikely to be as attractive as other offers available but could be slightly better than your current one and as long as you’re not locked in for a long period, you should benefit.
How long does remortgaging take?
If you’re switching to a new lender, then remortgaging typically takes up to two months. However, if your only changing product with your existing lender, then the process is generally shorter and should take around a month.
It’s therefore worth giving yourself a 3-month window before your current deal expires to research and compare your options. In addition to having paperwork to complete, you’ll likely have to pay arrangement fees, just like you did when you took out the original mortgage.
You may also need to pay early repayment fees as a penalty for paying off your old mortgage too soon. So it’s a good idea to see if you arrange the start date to occur the day before your current deal expires.
Is remortgaging worth it?
As even a single percentage change in the BoE interest rate can cost you hundreds of pounds extra each month in mortgage repayments, remortgaging can potentially save you thousands of pounds.
Of course, the reverse is also true. If the rate falls, even slightly then your mortgage interest rate becomes cheaper and therefore make remortgaging redundant.
This is why it’s worth considering if a new fixed-rate or discounted deal is cheaper and more predictable over the next 5 years.
As there’s a cost to remortgaging, it’s unlikely you will save money immediately. However, within a few months, you should start to see the benefits of remortgaging.
Will your current lender give you the best deal?
While remortgaging with your existing lender is usually easier and quicker, it doesn’t mean you’ll be offered the best deal. It’s quite likely that other lenders will offer you a better interest rate to entice you away.
However, this doesn’t mean you should automatically switch as you might be able to negotiate a better deal with your current lender using your research.
It’s so important to do your research and talk with a whole of market mortgage broker as they might be able to arrange an even better rate. If you do use a broker, you’ll need to add their fee to your calculations.
Knowing when to remortgage
Deciding when to remortgage can be complex. You’ll need to understand your current deal, how much equity you have and the mortgage market.
Whether you talk to your bank, current mortgage provider or a broker, you have nothing to lose. Any of these will be able to help you weigh your options and compare deals.
If in doubt compare your lender’s standard variable rate (worst-case scenario) with any new deal including any fees you’ll be charged. This way you’ll be comparing like for like and be able to make an informed decision.