Is remortgaging a good idea?

There are many reasons to remortgage, most of which revolve around saving you a good deal of money each month. You could save significant sums on interest, protect yourself against price hikes, make steps to clear your mortgage sooner, or release some equity to fund home improvements or consolidate debts. Let’s take a look in more detail:

• Your mortgage deal is coming to an end

  If you signed up for a fixed-rate mortgage when you bought your home, or have previously remortgaged to a fixed-rate deal, then the term of that deal will come to an end. Fixed-rate mortgages are usually fixed for between 2 and 5 years, though this can be as little as 1 year. When the fixed term ends, your lender will switch you to their ‘standard variable rate’.

• You have built up more equity in your property

  If the value of your property has increased since you took out your current mortgage, you should effectively own a bigger percentage of the property than you did previously. Alternatively, you may have been paying more than you needed to each month and so have reduced your original borrowing (assuming that the value of the property has not dropped).

  Maybe you needed to borrow 85% of the value of the property originally, but now that you have overpaid each month and/or the value of the property has increased, the sum you need to borrow is only equal to 75% of your property’s value. That’s great, because the lower the percentage of the loan you need, the lower the mortgage rates you’ll be offered if you decide to remortgage.

• You want to avoid an upcoming rate hike

  If you’re currently on your lender’s standard variable rate, any changes to the Bank of England (BoE) base rate could make your monthly payments more expensive. This is because lenders usually increase their standard variable rate in line with any BoE base rate changes.

  Similarly, if you’re on a fixed rate that’s coming to an end, any upcoming BoE base rate increases may mean that fixed-rate mortgages available to you may become more expensive than they are right now. In either case, it makes sense to review your options. Remortgaging in advance of upcoming hikes may well be wise.

• You want to get a better rate

  If you’re currently on a standard variable rate because that’s what you’ve always been on, or because you were on a fixed rate that ended, remortgaging to a fixed rate could save you money. If you’re on a fixed rate and are thinking about remortgaging because you’ve seen lower rates advertised, you need to check if your current fixed-rate deal carries a penalty for making early repayments. If it does, it could cancel out any savings that the lower payments on a new deal might give you.

• You now have more disposable income and want to make overpayments

  If you come into a lump sum of money, you may like to pay off or reduce your mortgage. The same applies if your salary goes up and you’d like to increase the amount you pay each month. If your current deal makes it impossible or prohibitively expensive to make overpayments, then remortgaging could be helpful, giving you a chance to borrow less at a lower rate. If you were to maintain or increase the amount of your monthly payments at the same time, you would put yourself on target to clear your remaining borrowing sooner.

• You want to borrow more money to make home improvements

  Remortgaging may be a good option if you want to raise money to pay for property improvements, such as converting a loft or refurbishing a kitchen or bathroom. In this instance, you could end your current borrowing and arrange a new loan large enough to include the sum needed for the improvements.

  Alternatively, you could look at a second charge mortgage. Here you continue with your existing mortgage, but use the equity in your property to take out a separate secured loan (with either the same or a different lender) to provide the money you need for your home improvements.

• You want to consolidate debts

  If you have outstanding debts that you’re struggling to manage, you could consider using the equity in your property and remortgaging to pay them off. Doing so may reduce your monthly mortgage payment and give you more time to clear it, freeing up money to repay your other debts. That said, there are barriers to remortgaging with debt. Lenders will review your credit file to get an idea of how well you can repay debts and whether you have missed payments on other loans.

Your specific circumstances should always be the deciding factor in whether you should remortgage or not. For example, penalty clauses for early exits can negate any benefits of remortgaging, while issues with your home’s value or your own credit history can make it difficult to arrange a remortgage. Whatever your situation, you should look carefully at the numbers and the alternatives to remortgaging before deciding what to do.

• Your mortgage debt is small

  If you only ever had a small mortgage, or only have a small balance remaining on it now, there may be little point in remortgaging. Lenders often charge significant setup fees when you move to one of their fixed-rate mortgages. On a small mortgage, these may cancel out the savings you stand to make by switching.

• Your early repayment fees are large

  If you want to remortgage from a fixed-rate deal that you are only a part of the way through, you must check if your current lender charges any early exit fees. If the penalty you would have to pay is large, it may simply cancel out any savings you’d gain from remortgaging. Furthermore, if you then switched to a new mortgage that had a setup fee, you could find yourself losing money rather than saving it.

  If you’re on a fixed-term deal and are aware that your current lender now has better deals available, talk to them about switching to one of these. There will most likely still be charges to pay, but these may be lower than if you were to switch lenders.

• Your home’s value has dropped

  Imagine you bought a property worth £200k with a £20k deposit and a 90% mortgage covering the remaining £180k. Now suppose the value of the property has fallen to £180k as the market has dropped. You still have a £180k mortgage but now it’s on a £180k value property. In other words you have a 100% loan-to-value (LTV) mortgage. While this scenario is unlikely if you’ve been making mortgage repayments, the example illustrates how a drop in property value can increase LTV and make you less desirable to lenders.

  You’re unlikely to find another lender willing to let you remortgage, and certainly not onto a particularly favourable rate (which usually requires your mortgage to be 50-75% of the property value). If you’re in this situation, all you can do is sit tight and wait for the value of your property to increase. If you’re currently on a fixed rate and this comes to an end, you may no longer qualify for the same band of rates as you did previously, due to now having a higher loan to value.

• You have very little equity in your property

  Like any business, lenders have to minimise their risk. So while they are there to lend money, they like to lend in situations where the value of the property is a good deal greater than the amount of the mortgage. This gives them confidence the property is worth enough for them to get back what they lend you if you can’t keep up with repayments.

  If you have little or no equity in your property because its value has fallen, or because you have already mortgaged it to the maximum, remortgaging will not be easy. However, mortgages are now available again for up to 95% of the value of a property, so if your numbers work out correctly, remortgaging with little equity may still be possible.

• You have had problems with credit since you took the mortgage out

  Lenders are required by the FCA (Financial Conduct Authority) – the body that regulates their activity – to do as much as possible to ensure that a mortgage is not only affordable for the borrower at the time the deal is agreed, but would remain so in the future if rates were to increase (fixed-rate mortgages would not be affected by a rate rise during their fixed term, of course).

  Any lender you approach to remortgage will check your monthly outgoings against your income and review your credit history. If you’ve missed payments on a loan, credit card, utility or similar account, this will show up and you may have trouble arranging a remortgage. If this happens, you need to set about trying to repair your credit rating. That’s rarely an instant remedy, however, and in the meantime you may need to look for an alternative to remortgaging.

• You already have a competitive mortgage rate

  It’s always smart to keep an eye on the deals available. Sometimes, however, it turns out that the deal you’re on is good, and that remortgaging would give you zero, or almost zero, benefit. If that’s the case, save yourself the trouble and enjoy the decision you made when you arranged your current deal.

  Stay vigilant, though. Rates change. Fixed-rate terms end. Even if you don’t need to do anything now, remember to look again in a few months.