On paper, it looks like it is a great opportunity to save money by decreasing monthly repayments. In the long term, however, your decision to remortgage the property may have some negative implications. It is important to do your calculations and consult your mortgage advisor.
While it is easier to get a mortgage (or remortgage) than it was 2-3 years ago, lenders are still strict and rejections happen every day. Since April 2014 much stricter affordability criteria have been introduced, meaning lenders must test how comfortable you can afford to repay – not just at today’s rates, but if they were at 6% or 7%.
Changes in the interest rates on mortgages could mean that you’re paying more than you should. One option might be to consider remortgaging to get a better deal and save money. Any remortgage will most likely involve fees and charges. If you’re going to save money, you need to work out all the costs before going ahead.
Here is a simple guide to remortgaging to help you out. It addresses some frequently asked questions.
What is remortgaging and why to consider it?
In short – it is a process of switching onto a new mortgage deal. Usually, it takes place when your current fixed mortgage period or introductory tracker rate ends. When that happens, you start paying standard variable rate (SVR) which is typically higher than the one offered by lenders. Of course, at this point, you want to consider a new deal.
More financially savvy customers tend to think long term and use remortgage as a shield against changing rates. If you are lucky and the current rates are low you may fix your rates for another few years. Fixing rates protects you against possible future rate rises.
It is a common practice to switch lenders although you can remortgage your property with the current one.
The two main reasons for a remortgage include
- Remortgaging to take advantage of a new interest rate or competitive introductory offer with a new lender
- Remortgaging to release some of the equity in your home by renewing your mortgage for a larger amount
Having a competitive interest rate on your mortgage is vital because different interest rates being charged on a set amount can mean a big difference to the total loan cost. You should always aim to keep your debts at the lowest interest rate possible. If your mortgage is not at a competitive rate you could be spending thousands of more pounds each year repaying your mortgage than is necessary and could save yourself a lot of money and many years off your mortgage term by switching to a better rate elsewhere.
Remortgaging is essentially about chasing the best interest rate on your mortgage possible. Lenders are much more interested in finding new customers than retaining their current ones.
Mortgages are advertised with respect to introductory interest rate offer in order to appear as the most competitive deal in comparison to other lenders.; these introductory offers usually take the form of discount rate mortgages, fixed rate mortgages, cash-back mortgages or capped rate mortgages for a set period, after which the interest rate reverts to the lender’s standard variable rate. At this point, your mortgage has stopped being competitive, as standard variable rates are generally high, and it is a good idea to consider your options within the market and take advantage of another lender’s introductory interest rate offers.
Opting to remortgage in order to find a better rate elsewhere can be an excellent money-saving technique, and when used correctly, you may find that you save thousands of pounds and cut years off your mortgage. Switching between lenders in order to take advantage of introductory offers is a good way to ensure your mortgage is always working for you, and your interest rate is constantly competitive.
In order for a remortgage to still be a viable option despite these charges, avoid lenders whose lock-in period extends past the end of the introductory offer so that you don’t have to choose between being hit by double exit fees or remaining stuck on a higher, uncompetitive rate. You should also ensure that the new mortgage rate will save more money than you will spend during the process of remortgaging; work out how much you will save each month, how long the offer runs for, and offset the benefits with the expenses incurred to ensure you really will be better off on a new deal.
What do I need to do?
- You need to assess your current mortgage and consider it’s competitiveness with what you could gain by going elsewhere.
- Work out the exact charges involved with leaving your current lender.
- See what is available to suit your needs with alternative lenders using independent comparison services, and work out the set-up and arrangement fees; remember to add in solicitors, valuation and survey fees.
- Compare your total costs involved with remortgaging with the monthly savings you will be making on your new deal. Factor in the upfront costs as monthly expenditure over the term of the introductory period. For example, if the introductory offer runs for 2 years and your upfront costs, when spread over a two-year period, do not reduce your monthly payments by a substantial amount, it may be worth going for a longer introductory period on slightly higher rates. Consider that at the end of the introductory period you may find yourself wishing to remortgage again, so don’t view upfront costs as a one-off payment assuming they will be absorbed by any savings you make.
- You should always speak to your current lender before making the decision to go ahead with switching to a better deal. They might be able to offer you a better deal in order to keep your business, in which case you may save a large amount of money and hassle. However, if they cannot beat the alternate option you have found elsewhere, get remortgaging! You could save yourself thousands of pounds on your mortgage and be free of your mortgage years earlier than if you stay with your current lender.
Typical remortgage fees – how much does it cost?
You can divide remortgage fees into two categories:
- Cost of leaving your current deal – fees going to your current lender
- Cost of setting up new deal – fess going to your new lender
There are two possible fees going to your current lender:
Early repayment charge
This fee applies to the situation when you decide to repay your mortgage in the tie-up period. The penalty charge may indeed be significant. It is easily avoidable – don’t repay your mortgage within a tie-up period and you will be safe.
Exit fee (also known as dead release fee or admin charge)
This is a fee you pay to your current lender. It is usually in the range of £0 – £300. Not all lenders charge it. To find our how much (or if you) have to pay refer to the Key Facts Illustration and the mortgage offer
There are two ways of paying it – either upfront or at the end of the mortgage.Other fees will go to the new lender
Other fees will go to the new lender
If you decide to go ahead and remortgage, the lender will want a valuation on the property. This is because if you encounter problems making the repayments, a lender might have to repossess the property. The valuation lets them know that they will be able to get their money back if necessary. Some lenders don’t charge for the valuation. If you do have to pay then the cost will be somewhere around £300-£400.
Any remortgage will mean a need for legal work. This mostly involves taking off the original lender’s concern in the property and adding the new lender’s interest. As part of the remortgage deal, most lenders offer a free legal package. On the downside, your solicitor will be one that they choose.
If you’ve decided to remortgage, you might opt to use a broker. If you do, then they could charge a fee. What the level of the fee is will depend on the broker and might be expensive. By shopping around, you may find one that does not charge a fee because they’re getting a good commission from the lender.
New Mortgage Repayments
If you know your mortgage interest rate, you can work out your new monthly mortgage payments. If you search online for ‘mortgage calculator’ you will find a choice of options to choose from. By entering your details into the mortgage calculator, it should give you an idea of what your monthly repayments will be.