What is remortgaging?
Remortgaging is the process of applying for a new mortgage with a different lender while staying in your current home. There are several reasons why someone might want to remortgage. Some people do it when their current mortgage product’s initial benefit period is ending, and they want to secure a new, more favourable rate offered by a different lender. Others may remortgage to raise additional money from the equity in their home for home improvements or to consolidate debt.
Reasons to remortgage:
A typical mortgage product has an initial benefit period of 2 to 10 years, with the majority of lenders offering 2, 3, or 5-year products currently. Throughout the duration of your full mortgage term, you will likely have between 5 and 10 different mortgage products. When a mortgage product ends, you usually revert to your current lender’s Standard Variable Rate (SVR), which is generally higher than your previous mortgage rate. However, the SVR offers more flexibility. Here are several reasons to consider remortgaging:
- Your current deal is about to expire, and you will be moved onto the lender’s SVR.
- Your circumstances have improved, and you may qualify for a better deal.
- Your home’s value has significantly increased, which could result in a better deal.
- You want to switch to a different type of mortgage product, such as fixed, capped, or tracker.
- You need a more flexible mortgage that allows you to miss or make excess payments.
- You want to borrow against your property for home improvements or debt consolidation.
- You may want to switch to a Buy-to-Let mortgage if you intend to rent out your property.
What are the costs of remortgaging?
The potential cost of remortgaging depends on various factors, including the terms of your current mortgage and the deal offered by the new lender. Similar to taking out a mortgage for the first time, some mortgage deals come with large arrangement fees, while others have fewer upfront costs. One significant fee to consider is the Early Repayment Charge (ERC) imposed by your existing mortgage provider. If you are still within the initial benefit period of your current mortgage, your lender will charge you a penalty for exiting the mortgage early, typically a percentage of the outstanding balance. This can amount to thousands of pounds. However, you can apply to remortgage within your existing lender’s initial benefit period, and completion can be delayed until it has expired, usually 3 to 6 months in advance, which is particularly useful when interest rates are rising.
Other costs associated with remortgaging include survey fees and legal fees. Usually, banks offer these services free of charge, but there may be instances where you have to pay or contribute to their cost. For example, if you add or remove a person from the mortgage, known as a transfer of equity, this may not be covered by the free legal service provided by the lender.
That’s why it’s important to think ahead to your next mortgage whenever you take one out. Consulting a mortgage adviser who can analyse the terms of any mortgage deal offered to you is recommended.
Is remortgaging right for me?
Remortgaging may not always be the most suitable option, even if your deal is about to expire. In situations where you have a very small mortgage balance and a short remaining term, switching to a new mortgage product may not be cost-effective. If you have little or no equity in your property, it may not be possible to remortgage, but there might be alternative options available to you instead of moving to your lender’s standard variable rate. Additionally, if your circumstances have changed since you initially took out the mortgage, such as a reduction in income or issues with poor credit, you may be unable to remortgage. Again, there may be other options available to you besides the lender’s standard variable rate. Furthermore, if you need to borrow additional money, there may be cheaper alternatives, especially for smaller amounts. A mortgage is a long-term debt that accrues a significant amount of interest over time, so an unsecured loan or a second charge loan may be a more cost-effective way to raise money.
This is why it’s crucial to consult with a knowledgeable adviser who can inform you about all the available options and help you make the best financial decision.