You’ve probably heard lots about remortgaging and how it can help you save on your monthly repayments or let you borrow some extra cash, but how do they work? And what do you need to know before you apply?
In this guide, we’re breaking down everything you need to know about how remortgages work.
What is a remortgage?
A remortgage, as the name suggests, is a brand new mortgage you can take out in order to replace your existing one. Alternatively, it can also be used on a property that is mortgage-free.
If you still have a lot of debt to pay on your mortgage then you might be able to save money on your repayments by shopping around for a remortgage with better rates.
Depending on your circumstances, a remortgage could be a way to save money on your monthly mortgage repayments.
You could also use your remortgage to borrow against the value of your property to get a bigger loan – this is known as releasing equity. Some homeowners do this to help fund the purchase of a new property, consolidate their debts, or to make improvements to their home.
How does a remortgage loan work?
Remortgaging works by using your equity – or, the amount of your house you own outright – as collateral against your new mortgage. If your current interest rates have shot up or your property has increased in value since you bought it, then a remortgage can often mean getting a better rate of interest on your monthly repayments.
All remortgages repay your existing mortgage debt, and give you a new mortgage, but one will only cover the existing mortgage debt and the other will give you a bigger loan.
A helpful way to distinguish between the two uses of remortgages is by thinking of one as being a renewal, and the other being a refinance.
- Renewal: this is when a remortgage is used to replace your existing mortgage, usually to get a better rate on your monthly repayments.
- Refinance: this is when a remortgage is used to release equity from your home’s value in order to secure an even bigger loan. This will still pay off your existing mortgage and give you more cash, but this means you will ultimately owe more.
Think of shopping for a remortgage in the same way you might look to switch energy providers or search for new car insurance or broadband. If you keep your eyes on the market regularly you might be able to snap up a great deal.
How to get a remortgage
Shopping around for a remortgage can help you save £1000s in interest repayments. However, it’s important to do your research and take your time before making a decision. Remember, a mortgage is probably the biggest financial commitment you’ll make in your lifetime.
You can use Loan.co.uk’s award-winning broker service to search for 1000s of remortgage deals. Using a broker or comparison service can quickly help you get a good overview of the market and give you the tools you need to weigh up all your options carefully.
When can I remortgage?
Choosing the right time to remortgage is the key to finding a good deal. It can be beneficial remortgage when your property’s value has increased, but there are other important factors to consider.
Remortgage when your current mortgage deal is about to end
A fixed rate, tracker or discount mortgage usually gives you a cheaper interest rate for the first 2 to 5 years of your repayment schedule. It’s a good idea to set a reminder in your calendar three months before your introductory rate is due to expire. This should give you plenty of time to do the necessary research before committing to a decision.
Once it ends the mortgage lender will put you on their Standard Variable Rate (SVR) which is usually a lot more expensive than their introductory offer rate. This is when it might be best to shop around for a remortgage deal and switch to a new introductory rate.
Remortgage when you want to overpay
Overpaying on your mortgage can be a great way to save money as you can avoid paying all of the interest over the full repayment term. However, some mortgages restrict overpayments or don’t allow them altogether.
If you do get a remortgage this might mean having to pay an early repayment charge and any associated exit penalties (this is because your new mortgage will essentially pay off your existing one), but if you remortgage to a deal that allows you to make overpayments, the savings could outweigh the initial fees in the long term.
Remortgage when your property value increases
If your property value increases during your mortgage term, then you could be allowed to borrow at a lower rate of interest. For example, if you initially took out a mortgage of £75,000 to buy a home for £100,000 (75% Loan-to-Value), and a few years into your mortgage, your home’s value increased to £125,000, you could remortgage to a deal in the 60% Loan-to-Value market, this should put you in a better position when it comes to browsing through deals.
The Loan-to-Value (LTV) bands categorise the mortgage deals accordingly. The higher your LTV on your mortgage – this is the amount you’re borrowing versus the amount of cash you’re putting up – the higher your interest rate is likely to be. The lower your LTV, the better the incentives will be when you do your search for a remortgage deal.
Having a lower rate means you can save £1000s on your mortgage repayments.
How long does it take to get a remortgage?
Typically it takes between 4-8 weeks to complete a remortgage deal. However, there are many variables involved and it can take longer depending on your circumstances. It can be done quite quickly but it’s a good idea to prepare for it at least a month or so in advance to make sure you get the best deal possible.
How much does a remortgage cost?
Besides the interest rates and broker fee you’ll have to pay on your new remortgage deal, there are some fees that are fairly common across most remortgages:
- Early repayment charge: This is typically 3-5% of your mortgage. You’ll likely have to pay this if your existing mortgage is being paid off early by your remortgage and is also with a different lender.
- Exit fee: This can be anywhere between £50 and £300. This is also sometimes known as an account fee and is an administrative fee for closing your mortgage account.
- New lender arrangement fee: Usually around £1,000 to £1,500. This is your remortgage providers’ fee for arranging your new mortgage loan.
- Legal fees: Typically around £300.
- Valuation fees: Typically around £200 to £300. In some cases the remortgage provider will waive this fee, but they’ll need to do a valuation in order to calculate the correct mortgage loan amount to offer you.
When should I consider alternatives to a remortgage loan?
There are many occasions and circumstances when remortgaging might not be the best route for your circumstance.
- Your mortgage debt is small: If you only have around £50,000 left to pay off on your mortgage then it might be worth considering an alternative route. If your mortgage has ERCs (Early Repayment Charges) then the penalty fees for exiting your mortgage could mean your savings won’t outweigh any fees you might have to pay. However, it’s always best to discuss your options with a broker for your personal circumstances.
- Your personal circumstances have changed: There are strict rules in place for getting a remortgage, so you will need to show evidence of income. If you’re earning less money or your work situation has become more precarious it might not be possible to get a remortgage.
- Your home’s value has decreased or you have too little equity: If your property’s value decreases then it means you’ll probably only have access to remortgages with higher interest rates. If you still don’t have enough equity in your home (the amount you’ve already paid off plus any increase in the property’s value) then similarly, you’ll struggle to get a decent rate on a remortgage.
- Your introductory mortgage rate hasn’t run out yet: Your mortgage’s introductory rate is likely to be one of the best rates on the market, but when it runs out you’ll want to get a remortgage in order to get the best deal available at that time. Set yourself a reminder three months prior to your introductory rate ending so you can start shopping around for a remortgage deal.
What are the benefits of remortgaging?
Wrapping everything up, the main benefit of remortgaging is the potential for it to save you money. A mortgage is a huge financial commitment, so remortgaging to a deal with lower interest rates can mean saving £1000s.
Another fantastic benefit to remortgaging is that it can help you borrow some extra cash. If you’re struggling to get approval for a loan, then you could use any increased value in your home to secure a bigger mortgage. However, if your credit is too low to be approved for a remortgage you might be better off taking out a homeowner loan, also known as a secured loan.
Taking it one step further, you could even use the extra money from a remortgage to make home improvements that could increase the value further. It’s not even out of the question to use it for consolidating debts.
Start your search for a remortgage deal using Loan.co.uk’s broker service.
REPRESENTATIVE EXAMPLE
For example, on a mortgage of £250,000 over a term of 25 years on an interest rate of 1.04%, the initial monthly payment would be £951.44 the total mortgage application fees would be £1,299.00, the total cost of the loan would be £389,970.02 and the APRC would be 3.9%.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.