Should you remortgage?
Many can slash costs by switching mortgage
Remortgaging involves securing a new mortgage on a property you already own. The primary motivation for remortgaging is often to cut costs, especially if your initial mortgage deal has ended and you’ve transitioned to a higher standard variable rate with your current lender. However, there are additional factors to weigh when considering remortgaging. This guide outlines the scenarios where remortgaging is advantageous and when it might not be the best choice.
If you’re in the market for a new mortgage, remember that switching to a new lender isn’t your only choice. You also have the option to negotiate a new deal with your existing lender, which is known as a product transfer.
What is remorgaging?
For many individuals, a mortgage represents their most significant financial obligation. Consequently, optimizing this major debt can lead to substantial savings—potentially thousands of pounds annually. If you’re someone who diligently compares prices for items like televisions or mobile phone plans, you might be overlooking an opportunity to apply those same strategies to reduce your mortgage costs.
Remortgaging offers both advantages and disadvantages. This article begins by exploring the benefits of remortgaging, but if you’re interested in understanding the potential drawbacks, you can proceed directly to the section titled “Why shouldn’t I remortgage?”
Reasons to remortgage
There are many reasons why you might consider remortgaging. These include:
+ Your current deal is about to end.
Many top mortgages have relatively short durations, typically ranging from two to five years. This is the common term for fixed rate, tracker, or discount mortgages.
When the term concludes, your lender will switch you to their standard variable rate (SVR), which is usually much higher than your previous rate and the best current deals. Currently, SVRs generally fall between 7.5% and 8.5%. To avoid falling into this higher rate, it’s wise to begin exploring remortgage options about six months before your existing rate expires. This proactive approach helps you avoid any delays that might leave you on the SVR.
+ You want a better rate.
If you’re currently locked into a mortgage, breaking that deal may come with an early repayment charge (ERC). These charges can be substantial—often ranging between 2% and 5% of your remaining loan balance. Additionally, there might be a small exit fee, which could be labeled as an ‘admin fee’ or ‘deeds release fee,’ when you pay off your mortgage.
However, this shouldn’t automatically deter you from the possibility of remortgaging. The potential savings from switching to a better deal can be significant, even if you need to pay an ERC, particularly if you have a large mortgage balance. Our Compare Two Mortgages calculator can illustrate how a better interest rate could impact your savings.
If you’re thinking about remortgaging to secure a lower rate, it’s crucial to crunch the numbers beforehand. Our Ditch Your Fix calculator can assist in determining what new interest rate would make paying an ERC worthwhile.
+ Your home’s value has gone up…a lot.
If the value of your property has increased significantly since you secured your mortgage, you might now fall into a lower loan-to-value category, which could qualify you for reduced interest rates. It’s important to run the numbers, but exploring this possibility could be beneficial.
+ You’re worried about interest rates going up.
Hold on! Before jumping to conclusions, it’s important to understand what is meant by rates going up.
If the prediction is about an increase in the Bank of England base rate, this could directly impact your mortgage payments, particularly if you have a variable rate mortgage, like a tracker, which is sensitive to changes in the base rate.
However, if the rates being discussed are those offered to new customers, it doesn’t necessarily mean your existing rate will be affected.
+ You want to overpay & your lender won’t let you.
If you’ve recently received a salary increase or come into an inheritance, you might be considering making additional payments on your mortgage. However, your current mortgage terms might either restrict extra payments or only permit a minimal overpayment.
By opting for a remortgage, you could reduce the principal amount of your loan and possibly secure a more favorable interest rate. Be mindful, though, of any early repayment penalties or exit fees that could apply. Weigh these costs against the potential savings from a reduced mortgage rate to determine if it’s worth proceeding.
+ You want to switch from interest-only to repayment mortgage.
In most cases, you won’t need to remortgage to make this change; your current lender should be willing to accommodate the adjustment.
Typically, you can alter a portion of your loan to a capital repayment plan while keeping the remainder on an interest-only basis. This can be especially beneficial for those with an underperforming endowment mortgage, which might lead to a shortfall at the end of the term.
Conversely, switching from a capital repayment plan to interest-only is a different matter entirely. You should anticipate a challenging process if you attempt to make this change, and some lenders may not even entertain the request.
+ You want to borrow more.
If your current lender has declined your request for additional funds or the terms they offer aren’t ideal, switching to a new lender through remortgaging might be a viable option to secure money at better rates. However, it’s crucial to consider all associated fees to determine if this approach is truly more cost-effective compared to other borrowing methods.
When applying with a new lender, you will need to specify the purpose of the extra funds. Interestingly, lenders may be more receptive to financing for a new car rather than for business ventures. On the other hand, they are typically reluctant to provide loans for starting a new business.
Commonly accepted reasons for borrowing additional money include funding home improvements or consolidating existing debts. Be ready to provide supporting documentation if you are requesting a substantial amount, such as contractor quotes for renovations or proof of debt repayment.
+ You want a more flexible mortgage.
You might be interested in mortgages that allow for occasional payment breaks, whether due to changing jobs, returning to school, or traveling. Certain mortgage options offer the flexibility to take payment holidays.
Alternatively, you might be drawn to innovative mortgage products that integrate your savings accounts with your mortgage.
No matter what type of flexibility you’re seeking, it’s likely available. However, be aware that these added features often come with a higher interest rate. Therefore, it’s wise to consider whether you’ll actually use these extra features before opting for them.
If you think remortgaging could be beneficial, it’s advisable to start your search at least 14 weeks before you plan to make the switch.
Reasons not to remortgage
Given your particular situation, opting to remortgage at this moment might not be the most advantageous choice and could entail certain drawbacks. Below are some potential reasons why this might be so.
– Your mortgage debt is really small.
When your mortgage balance drops to a certain level—approximately £50,000 or less—it might not be beneficial to switch lenders. This is because the potential savings might not justify the cost of switching, especially if there are high fees involved. In fact, some lenders might not even consider mortgages under £25,000.
It’s worth reviewing your options, but focus on rates that come with minimal or no fees. With a smaller mortgage, any fees you incur have a more significant impact. Often, it may be more advantageous to stay with your current lender, even if it means sticking with a higher interest rate.
– Your early repayment charge is large.
A substantial early repayment charge (ERC) might make it imprudent to break your current deal before its term concludes. To assess whether it’s financially sensible, utilize our ‘Ditch your fix?’ calculator to run the numbers.
If the cost to exit your existing deal is prohibitive, it’s crucial to stay informed and prepared to make a move as soon as feasible.
Alternatively, consider negotiating with your current lender to switch to a different deal (a product transfer) while paying a lower ERC. Although you might not secure their most premium offer, finding a significantly better deal without extending your commitment too much could be advantageous. Again, use our Ditch your fix calculator to evaluate the financial implications.
– Your circumstances have changed.
Your financial situation may have changed since you initially took out your mortgage, such as if one of you has stopped working or you have become self-employed.
Due to strict mortgage regulations, lenders are required to verify your income. As a result, they might not be willing to approve a new loan if you no longer meet their criteria, which could force you to remain in your current situation.
In such a scenario, you might consider exploring the best offers from your current lender. This process, known as a product transfer, could be a practical first step. Although it might not always provide the best rate available in the broader market, it typically involves less paperwork and fewer fees compared to a full remortgage, especially if you are not changing your mortgage terms or borrowing additional funds.
You can use our Mortgage Best Buys comparison tool to view the product transfer deals offered by your current lender.
– Your home’s value has dropped.
When you purchased your home, you might have put down a 10% deposit and secured a mortgage for the remaining 90% of the property’s value. However, with recent declines in property values, the amount you owe now constitutes a larger portion of your home’s worth.
This situation has left you dealing with reduced equity, despite your efforts to make regular mortgage payments. In more severe cases, you could be facing negative equity, where your outstanding debt exceeds the current market value of your property.
To navigate this challenge, it’s crucial to remain patient, make extra payments when feasible (without incurring additional fees), and wait for the property values in your area to rebound.
– You have very little equity.
If you’re looking to borrow over 90% of your property’s value, securing a more favorable rate can be challenging. However, with 95% mortgages becoming increasingly competitive, it might be beneficial to explore whether switching could offer you a better deal.
Additionally, be sure to verify whether your existing lender imposes an early repayment fee for exiting your current mortgage.
– You’ve had credit problems since taking out your last mortgage.
Today’s lenders are increasingly selective about whom they choose to finance. The Financial Conduct Authority mandates that they thoroughly evaluate whether a mortgage is affordable not only at current interest rates but also at higher rates, ensuring you can manage payments even if rates increase.
Consequently, lenders will scrutinize your expenditures closely and prefer borrowers with impeccable repayment histories or at least a strong, clean record of managing debts responsibly. Even a single missed payment on a credit card, loan, mortgage, utility bill, or mobile phone can significantly affect your chances.
For tips on improving your credit score and smoothing out any blemishes on your credit report, refer to our guide on boosting your credit score.
– You’re already on a great rate.
You might currently be enjoying a deal so exceptional that it would be unwise to switch lenders at this moment…
However, don’t get too complacent. When your current deal expires, it’s likely that your lender won’t provide the most competitive rates available. Eventually, you’ll need to think about joining the remortgaging cycle to find a better offer.
Looking for more mortgage help?
We’ve got lots of other helpful guides and tools:
- Cheap mortgage finding. Step-by-step on how to find the top deal for you.
- Mortgage best buys. Our tool compares the top deals on the market.