Remortgaging can be a tricky concept to get your head around, but we’re here to make things a little easier.
In this post, we’ll explain what remortgaging is, when you might choose to do it, what it can offer and what to consider before you go ahead.
What is a remortgage?
When you remortgage, you’re taking out a new mortgage to replace your old one. Sounds simple? But there are a few different reasons why you might decide to do this.
The first reason to remortgage is simply because your existing deal has run out. When you take out a mortgage, it usually comes with an introductory offer like a fixed or tracker interest rate that lasts for two years (although these can last for up to ten years).
When this deal runs out, you will typically transfer to your lender’s own rate, which is known as a Standard Variable Rate (SVR). This can be quite a bit more expensive that the rate you were previously paying.
However, you aren’t usually charged an early exit fee for switching from the SVR to a new deal with your lender – or a different lender entirely. So, it’s a good idea to start shopping around for a new mortgage when you know your current deal is coming to an end.
Another reason you may choose to remortgage is if you feel you could be getting a better deal than the one you’re currently on, particularly if the value of your property has increased dramatically.
You may have signed up to one interest rate but since found you could be getting a much more competitive deal. Maybe interest rates have fallen or your property’s value has gone up (giving you a greater share of the equity) and you want to benefit by switching to a mortgage with a lower interest rate.
If this is the case, you should be very careful that the switch will indeed save you money. Many lenders charge you for repaying your mortgage early before your deal has ended, and this can be quite expensive.
Make sure that this fee won’t actually outweigh the money you’ll save switching to a lower interest rate. If it will, you’re probably better waiting for your deal to end before you remortgage.
Remortgaging to borrow more against the value of your home can appear a more affordable way to borrow than taking out a personal loan, as the interest rate tends to be lower than on unsecured borrowing. However, because the payments are spread over a longer period, you could end up paying more overall – so it’s important you think carefully before remortgaging for this purpose.
What does it offer – pros and cons
As we outlined above, remortgaging can offer a range of benefits. It can let you benefit from a lower interest rate than you’re currently on – particularly if you’ve been switched to an SVR.
Remortgaging can also let you borrow more to spend on home improvements or debt consolidation. And because this type of borrowing is secured against your property, it might be a more affordable option than using a personal loan or credit card to access the money you need.
However, on the flip side your lender might charge you if you try to remortgage before the deal you signed up to has ended, which could wipe out any saving you were going to make.
And if you were planning to remortgage to borrow more, it will take you longer to pay off your mortgage. If you’ll need to extend it to a point in the future where you’re older than pension age, a lender might turn you down anyway out of concern that you won’t have the income to cover your repayments.
Most importantly, remortgaging to borrow more might mean your monthly payments go up. If you struggle to afford these payments and start to miss them, your home will be at risk of repossession.
What to think about
There’s plenty to consider when you’re thinking of remortgaging: will it make your repayments too expensive; will it cost you more to switch deals than you’d save; what will your income be by the time you reach the last few years of your term?
Remortgaging may turn out to be the right decision for you. Just be sure to do your research – and your maths – first to make sure it offers you everything you want.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.