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Remortgaging basically means ditching your tired old mortgage for a shiny new deal. It's usually done for two reasons: to save money or to raise money.
There are three main types of remortgaging activity – in the guide that follows we'll mainly be concerned with the first.
1. Escape the SVR: Generally this is done to cut your monthly mortgage bill by escaping from the clutches of your lender’s Standard Variable Rate (SVR: this is usually a couple of percentage points above the Bank of England’s Base Rate).
2. Equity Release: People increase their mortgage and use the money to fund home improvements, the purchase of a car, a luxury holiday, school fees – whatever they need the money for.
This can be a cost-effective way to raise money because the interest rate on mortgages is usually cheaper than on other personal loans. It can also make a lot of sense if the money is used to increase the value of your property (but what the hell, shopping is fun too!)
3. Buy-to-let: Investors use remortgaging to build their portfolios – they remortgage a first property that has risen in value to fund a deposit for a second investment, then remortgage that one … and so on.
Anyone who owns property can consider remortgaging. David Hollingworth of London & Country says:
"If you're not tied into a current deal and you're paying a Standard Variable Rate I’d urge you to investigate remortgaging.
"Even if the mortgage is very small and nearing the end of its life, the existing lender may be able to offer a no-fee option at a better rate."
You can cut your monthly mortgage bills significantly by remortgaging. London & Country offer the follow examples:
A person with a £150,000 interest-only mortgage on an SVR of, say, 7.5 per cent would be paying £937.50 pm. But by cutting the mortgage rate by two per cent to 5.5 per cent, their monthly payment would fall to £687.50 pm. That's a saving of £250 pm – and that's a lot of money to most people.
People coming off discounted deals from a few years ago can also avoid payment shock by remortgaging. Consider the following:
Two years ago this month, the best-buy two-year fix was from Newcastle Building Society at 4.49 per cent with a £420 fee, which, based on a £150,000 interest only loan, would have cost £561.25 per month.
When this deal comes to an end, the rate will revert to Newcastle’s SVR, currently 7.34 per cent, resulting in new monthly payments of £917.50 – a jump of over £350.
Borrowers can minimise payment shock by arranging a new deal, either with their existing lender, or a new one.
Halifax currently offers a two-year fix at 5.34 per cent with a £999 fee and no other costs. Switching to this would mean monthly payments of £667.50 and a more manageable increase of £106.25.
You can remortgage with your own lender or with a new lender. These are the mains steps in the process.
1. Check Repayment Charges: First, check that there are no early repayment charges payable on your current mortgage – this will give you a good idea of how much it might cost you to switch.
2. Contact Existing Lender: Then contact your existing lender, explain that you want to remortgage and see what they offer you. Lenders like to hold on to customers so they should be keen to help.
3. Compare With Other Deals: Next, compare this with deals available from the open market. One of the easiest ways to go about this is to approach a 'whole of market' broker (such as London & Country ). You can then see which would be the best deal for you.
4. Valuation Needed: The lender will require a valuation to ensure the value of your property is sufficient for them to lend on. Property prices can fluctuate over a short space of time so that, even if you're remortgaging a year after purchase, you could still see a change in your home's value.
5. Apply To Lender: You'll be required to make an application to the lender in the same way as when buying a property. The application has to be underwritten by the lender, who will require evidence that the loan to date has been maintained.
6. Offer & Conveyancing: They'll then issue you with an offer. Conveyancing work will need to be carried out, and many lenders will only instruct a firm of solicitors with two or more partners.
7. Local Searches: During the conveyancing process, local searches will be conducted and a report and title will be sent to the new lender.
8. Funds Released: Finally, the solicitor will ensure that your previous lender is repaid when the new lender releases the new mortgage funds. If you're borrowing additional funds, the solicitor will release these to you on, or shortly after, completion.
It’s important to look beyond the headline interest rate when selecting a new deal and consider the set-up costs as well. Costs can include:
• Early repayment charges (in some cases).
• Lender's arrangement fees – up to £1,000.
• Broker's fees (in some cases).
• Valuation fees (varies with property size but typically £200-300).
• Legal fees (typically £350).
Paying all these fees could take a massive chunk out of the potential savings. The good news is that some lenders offer help with these costs as incentives to remortgaging customers. David Hollingworth offers the following examples:
Abbey and Halifax offer two-year fixed rates through brokers at 5.34 per cent - there is still a £999 arrangement fee but the valuation and legal work are free.
Woolwich offers a lifetime tracker at 0.18 per cent above Base Rate that has no arrangement fee, a free valuation and free legal work for remortgages.
Note: The smaller the mortgage the more important it is to seek out products that cover these costs as their impact is higher on more modest mortgages.
If, for example, you want the security of knowing what your monthly payments will be you might want to choose a fixed-rate mortgage.
However, if rates are likely to fall, that might not be the best option. At the moment, for example, rates are 5.5 per cent.
Many think this is as high as they will go, and there is speculation that they will come down later in the year, so if you take out a fix now and rates drop later in the year you will effectively have bought a fixed-rate loan at the top of the market.
Under such circumstances, it might be better to choose a tracker mortgage.
If, on the other hand you think rates haven't peaked a fixed deal should offer some protection from further rises. It really depends on where you think rates are going - discuss it with a broker before you make a decision.
Check out the latest deals and use our handy loan calculators in our Mortgage Centre
Michael O'Flynn
