Beginners guide to remortgaging

A remortgage is essentially switching your existing mortgage to a new one.

The process essentially involves switching from your existing mortgage to a new deal, either with your current lender or a different one.

You should start looking for a new mortgage deal 5-6 months before your existing deal ends to avoid being moved to a Standard Variable Rate, which tends to be a lot more expensive than your fixed rate.

Why should I remortgage?

People remortgage for various reasons. Remortgaging is often done to secure a better interest rate, release equity, or change the terms of a mortgage agreement.

Remortgage to get a better interest rate

If your current deal has ended and you’re on your lender’s Standard Variable Rate (SVR), typically higher, remortgaging to a new deal can save you money.

Remortgage to borrow more money

If you need extra funds for home improvements, a new car, or other expenses, remortgage can provide access to a lump sum.

Remortgage to make overpayments

You may want to remortgage if your existing deal doesn’t allow you to make overpayments.

Making overpayments on your mortgage can be a strategic financial move with several benefits:

• You will save money on interest. By paying off more of your mortgage principal, you reduce the amount of interest charged over the life of the loan.
• It will shorten the mortgage term. By making overpayments, you can significantly shorten the length of your mortgage, meaning you can become mortgage-free sooner.
• Knowing you’re paying off your mortgage faster can provide financial security and reduce stress.

You can make regular monthly payments or just one-off payments, just make sure that your new lender doesn’t change for overpayments. Most lenders allow overpayments of up to 10% of the outstanding amount each year during the term of a fixed-rate mortgage.

Remortgage to fix your monthly repayments

Mortgage rates are dictated by the Bank of England (BOE) base rate. The base rate is decided by the Monetary Policy Committee (MPC). The MPC meets several times a year to discuss base rate, taking into consideration factors such as inflation, economic growth and UK employment rates.

If you are not on a fixed-term deal, even small changes to the base rate can have a significant impact on your monthly charges.

To give you an idea, we put together a handy table to illustrate the monthly cost of £300,000 repayment mortgage with 25 years remaining.

Fixed rate mortgages are not impacted by the Bank of England base rate so you know the exact amount you have to pay each month for the duration of your mortgage agreement. Once the mortgage has come to its end (it could be 2 or 5 years), you will be moved to a variable rate.

Remortgage to change your repayment terms

You can remortgage to switch from a fixed-rate to a variable-rate mortgage (or vice versa) to better suit your financial situation.

Remortgage to consolidate debt

The extra money from a remortgage can be used to pay off other, high-interest debts, such as credit card or personal loan debt.

Remortgage to avoid Standard Variable Rate (SVR)

Once your initial mortgage term ends, you’ll likely move to an SVR, which can be higher than competitive market rates.

Imagine you have a mortgage with a 2-year fixed rate at 2.5%, and this period is ending. Your lender’s SVR might be 4.5%. Remortgaging can help you find a new deal closer to the current market rate, say 2.0%, thus reducing your monthly payments.

When should you start the remortgage process?

Timing is crucial in the remortgaging process. Here’s a breakdown of when to consider starting the process:

1. Before your current deal ends

Plan ahead and start the remortgage process 3 to 6 months before your current mortgage deal ends. This allows ample time to shop for rates, compare lenders, and complete the necessary paperwork. Beginning the process early helps you avoid being moved to a lender’s SVR, which is typically higher.

2. Review market conditions

Market conditions include factors like falling/increasing interest rates and property values.

If market interest rates are dropping, securing a lower rate might be an excellent opportunity before they rise again. Similarly, when property values rise, your equity increases, making it a good time to remortgage.

3. Personal financial changes

If your credit score has improved since you took out your mortgage, you might qualify for better rates. A higher income might enable you to afford a more favourable mortgage deal or a shorter term.

4. Significant life events

If you anticipate significant expenses, like home improvements or schooling costs, remortgaging to release equity could be beneficial.

Changing jobs, having a child, or relocating can affect your financial situation and might necessitate a remortgage to better suit your new circumstances.

Be aware of potential early repayment charges if you leave your current deal early.

Redemption fees

Be aware that you might have to pay a fee (called a redemption fee) to end your current mortgage deal early. The fee is usually equivalent to up to 5% of the outstanding mortgage balance if you have 3 years left of your remaining deal.

It goes down to 3% of the remaining balance if you have 2 years left and 1% of the remaining balance if you have 1 year left.

Not every mortgage has one. If yours doesn’t, you can remortgage at any time.

If it does, and you don’t want to pay the fee, complete on your new remortgage deal the day after your current mortgage deal expires. If your mortgage deal is in place for a while and you need to remortgage as soon as possible, find out how much the charge is and decide if it’s financially viable to leave your existing deal. You may find that the savings you could make over the term of a fixed deal are worth paying the redemption fee.

Steps to remortgage your property

1. Evaluate your current mortgage

Check your current mortgage terms, interest rate, remaining balance, and early repayment charges 3-6 months before your deal ends. You can find this information by logging into your online mortgage portal, phoning your current mortgage lender, checking a recent mortgage statement or your original mortgage documents, which will show how much capital you will be paying off each year. Once you know your mortgage balance, you can determine if you can obtain another mortgage and whether it would be affordable (especially if your circumstances changed). Weigh any fees, such as exit fees or early repayment charges against potential savings. If your mortgage balance is within approximately four and a half times your income, then you should be able to remortgage with most mortgage lenders. 

2. Review your credit report before applying for a mortgage

Securing a mortgage requires a good credit score, which will help convince lenders that you are a worthy customer. Use a credit reference agency like Experian or Equifax to check your credit score. Your credit report will show your history with loans, credit cards, overdrafts, mortgages, mobile phone contracts, and some utility bills for the past six years. These credit reports are free of charge. If your credit report isn’t good, you need to make changes and work on improving your credit score before you apply for a mortgage.

3. Assess your financial situation

Are you a ‘mortgage material’? Ideally, you would have at least 6 months of continuous employment history, a good credit score, and a debt-to-income ratio of under 40%.

4. Research the market

Compare the best remortgage deals to see what you can find against what your current mortgage lender will offer you. Use online tools such as our Mortgage comparison tool to compare rates and deals from different lenders. Look at both fixed-rate and variable-rate options to determine what suits your needs and account for any arrangement or product fees associated with new mortgage deals.

Staying with your current mortgage lender means you don’t have to have a valuation on your property, and there will be no legal fees or legal work will be required. The mortgage lender may not request any additional information or documents from you, making the product transfer (name for remortgage when you are staying with the same lender) a more convenient option. Additionally, if your circumstances have changed and your income will no longer support your mortgage balance (meaning that your mortgage balance is more than 4.5 times your income) some mortgage lenders may still offer you a product transfer on the basis your mortgage payments are up to date, and you’ve never missed a payment.

Staying with your existing mortgage lender isn’t always the best option. Some lenders offer time-limited deals that could save you a lot of money.

5. Value your property

Before you start looking at remortgaging deals, you need to know the value of your property. The lender will send an independent valuer to confirm the figure. Lenders require a valuation fee for their security. If you fail to repay your mortgage, they can repossess the property and get their money back.

On the flip side, you may find that your property has increased in value, your LVT (loan to value) has improved and hold more equity in your home. This means that you may be able to get a better deal.

To calculate the LVT, follow these steps:

• Divide the amount you have left on your mortgage by the market value of your property. For example, if you owe £300,000 on a £380,000 house, divide what your own by the property value: 300,000 / 380,000 = 0.79
• Convert this to a percentage by multiplying by 100. In this example, 0.79 becomes 79%. This is your LTV ratio.
• Now, compare this figure to your original mortgage deal. Mortgage lenders usually have different deals for loan-to-value brackets at 60%, 70%, 75%, 80%, 85%, 90% and 95%. If you’ve crossed into a new bracket, you might be in a great position to remortgage.

6. Decide on the new mortgage deal

Once you know how much you can borrow, it is time to progress with the new mortgage deal. This is when you need to decide if you want a fixed-rate, tracker, or variable-rate mortgage. Look at the length of the mortgage term and consider both monthly payments and overall interest costs. Finally, evaluate any additional fees for setting up the new mortgage.

7. Gather all required documents

Make sure you have all of the documents you require, including valid ID (passport or driving licence), recent utility bills or bank statements to verify your address (no older than 3 months), and proof of income. You will need three months’ payslips or two years’ accounts if you are self-employed. Finally, ensure you have your current name and address on all the documents.

8. Apply for the remortgage

Now, it’s time to complete and submit the application with your chosen lender.

The lender will likely conduct a valuation to determine your property’s current value (digital valuation based on the price of properties sold in the area).

The process of remortgaging typically takes 4-8 weeks. It starts with submitting the mortgage, thorough property valuation, and assessment of your documents and current situation.

All being well, you will be issued with a mortgage offer.

You can remortgage to pay off your current mortgage lender without borrowing any extra funds, known as a like-to-like remortgage, or if you have the income and the available equity, you can borrow extra money on top of paying your current mortgage. You could use the extra money on renovations, paying off the debt, a wedding, or buying another property.

9. Cost of remortgaging

The mortgage lenders often offer a free valuation and free legal fees (conveyancing fees). You will need to pay an arrangement fee, which can be added to the loan. The fee varies from one mortgage lender to another. At Mortgage Decisions, we charge a fee of £xxx to arrange your new mortgage.

We won’t charge you a fee if you are a member of the Blue Light card (available to the emergency services, NHS, social care sector, and armed forces).

Should you use a broker for remortgaging?

The decision depends on your personal preferences and circumstances. If you value time, expertise, and a stress-free process, a broker is a good option. However, if you enjoy research and are confident in navigating the mortgage market, consider doing it yourself.

Advantages of using a broker

• Brokers can access market insights and provide tailored advice based on your situation.
• Brokers have access to exclusive deals not available directly to consumers.
• A broker handles much of the research and paperwork, saving you time and effort.
• If you have a complicated financial situation, a broker can help you navigate options.

Disadvantages of Using a Broker

• Brokers charge fees, either upfront or as a commission, which can add to your costs.
• Not all brokers cover the entire market; some are tied to specific lenders.

Can I remortgage to purchase a Buy to let?

Yes, you can remortgage to buy a rental property if you have equity in your home you can use to finance your new purchase. With a good remortgage deal, you can save money on existing mortgages and raise funds to buy a second property. Bear in mind that having two mortgages can be financially demanding so make you are in a position to do so.

Is there an age limit on remortgaging?

There’s no legal age limit for remortgaging, but lenders have their own criteria, and those over 70 may find it more difficult to secure suitable deals. We can help you find suitable lenders and secure a new mortgage.

Can I remortgage if my property value has decreased?

If your property has decreased in value, remortgaging might be more challenging. You could end up in negative equity (owing more than your home’s worth), limiting the number of lenders willing to offer a new deal. It’s important to get a realistic valuation and consult with a mortgage advisor. Give us a call on 03454 500200 and we will see what we can do for you.

Can I remortgage if I am self-employed or have irregular income?

Self-employed individuals or those with irregular income can remortgage, but they might face stricter lending criteria. Lenders typically require evidence of consistent income, such as tax returns, bank statements, and accounts for the past 2-3 years.

How much equity do I need to remortgage?

Lenders usually require a minimum amount of equity in the property to consider remortgaging. Typically, a loan-to-value (LTV) ratio of 80% or lower is ideal, meaning you should have at least 20% equity in your home.

Can I remortgage if I am retired or approaching retirement?

Some lenders have age limits, but options are available for retirees or those nearing retirement. Lenders will consider retirement income, such as pensions, when assessing affordability.

Summary

Remortgaging can be a valuable financial strategy when done for the right reasons and with careful consideration. It’s advisable to seek independent financial advice or consult a mortgage broker, such as Mortgage Decisions, to make an informed decision based on individual circumstances.