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A Guide to Remortgaging

If you currently have a mortgage on your home, you may not be getting the best deal. This is especially true if you're nearing the end of your deal, or you've been using the same lender for years. About a third of mortgages in the UK are remortgages, so follow this guide and see if you too could save money by remortgaging.

Why you should remortgage?

Remortgaging is when you change the current mortgage you have to a new deal. You can do this by switching lenders entirely or moving on to a new deal with the same lender. The main reason most people consider remortgaging is to save money. However, the benefits of remortgaging are different for everyone depending on your current situation. If the following criteria apply to you, it is likely you could save a lot of money by remortgaging.

Most of the best mortgage deals last between 2 and 5 years. Once this term is up, you will be automatically placed on your lender's default Standard Variable Rate. These usually have some of the highest interest rates offered by your lender, so it's definitely worth remortgaging before your current deal runs out to prevent you from being overcharged. Try and make the switch to a deal with lower interest rates about 14 weeks before your current deal ends.

If the value of your home has gone up significantly since you took out your current mortgage, your loan-to-value ratio will have decreased. This is the amount you borrow for your mortgage as a proportion of the total value of your property. If your LTV ratio is lower than before, you could be entitled to better rates. If this is the case, you should compare the market to see if you can find a better deal. However, you should consider any early repayment charges that your lender could hit you with to see if switching will actually save you money.

Any increase in the Bank of England's base rate could adversely affect your mortgage payments if you're on a variable rate. If you are on such a rate, it could be worth remortgaging to a fixed rate deal, which would ensure your interest rates won't go up or down over your term and thus give you more security. Again, consider any early repayment charges before you decide if a remortgage is right for you.

If you've recently inherited some money or had a pay rise or bonus, you might want to use some of those extra funds to go towards paying off your mortgage. However, a lot of lenders won't let you increase your monthly payments or pay off a large chunk all at once. If this is the case, it could be worth remortgaging to find a better deal that works for you. By reducing the amount you need to borrow, you can save money by finding cheaper rates. However, you need to consider early repayment charges to work out if switching will save you money.

You might want to take out a higher loan in order to build that extension or to pay off other debts. Many lenders will refuse to lend you more money or will offer you higher loans but with poor rates. In these cases, it could be worth remortgaging to a different lender so you can raise more money on lower rates. Your lender will ask what your higher loans are needed for, and you will usually be asked for evidence, for example a builder quote if you are doing work to your property.

It could be possible that your life has had a sudden change of direction. Maybe you've decided to go back to university, or you want to travel the world for a few months. Being tied into a mortgage can be a hinderance to people that want to do these things, especially with lenders who won't let you miss any payments. However, there are mortgages available that give you a lot more flexibility and that allow you to take payment holidays. While remortgaging to a more flexible deal will allow you more freedom in your life, they will come at a price. They will normally have higher interest rates, so you will have to chose between flexibility and cost-efficiency.

Why you shouldn't remortgage?

Remortgaging isn't for everyone. Here are some factors that could mean remortgaging is not worth your time or will end up costing you more.

Most mortgages include early repayment charges, which is an exit fee you must pay if you want to leave your deal before the term has expired. These can often be quite expensive and cancel out any potential savings you can make by remortgaging.

If you're close to paying off your current mortgage, you will probably find it difficult to find a new lender willing to offer you a loan. There may be other deals available with lower interest rates, but if there's only a small amount you need to pay off, switching could cost you more if there are any early repayment charges.

If your property has decreased in value since you took out your mortgage, your loan-to-value ratio will be higher. In this case you will find it difficult to find a better deal elsewhere. You could even find yourself in negative equity, where the amount you're paying on your mortgage is higher than the total value of your home.

A lower credit rating means lenders are less willing to offer you a loan, so you will find it difficult to remortgage if this applies to you. Any missed payments on your credit cards, utility bills or phone contracts will negatively affect your credit rating. Before you think about remortgaging, you should look at ways to improve your credit rating first to make it easier to find a better deal.

It is possible that you can't get much better than the current deal you're on. Whatever deal you have however, it is worth looking around and comparing the market to see if there is anything better available. Rates are constantly changing and new deals becoming available, so if your current mortgage is the best deal available today, it might not be tomorrow.

What kind of remortgages are available?

Fixed rate

With a fixed rate mortgage, your monthly payments and interest rate will stay the same for the full length of your term. They typically last between 2 to 5 years, but longer terms can also be found. At the end of a fixed rate deal you will be automatically switched onto a standard variable rate, which are normally the most expensive available.

Standard variable rate

These remortgages are generally not advisable as there are usually always cheaper options available. They are the default rates that your lender will place you on if you let your term expire without remortgaging. The interest rates vary hugely between lenders but will typically be higher than the Bank of England base rate.

Discounted rate

These are the same as SVR mortgages, although they include a discounted rate for a set amount of time. However, although the discounted offer will be lower than the lender's own SVR, they may still be higher than other lenders' SVRs, so are rarely the cheapest deal available even though they have discount' in their title.

Tracker

Tracker mortgages have a variable interest rate that could be set below, above or at the same rate as the Bank of England base rate. Your monthly repayments will rise and fall in line with changes in the Bank of England's rates. This will be beneficial to you when interest rates are falling, but of course they can also rise, so you need to be confident that you can afford any increases in your monthly repayments in the case of any increases.

Capped rate

This is a variable rate mortgage with a cap in place to limit how high the interest rates can go. These could be good for you if you want a variable rate that could go up or down, but don't want to be hit with dramatic price increases that could make your repayments unaffordable.

Offset

These mortgages are designed to lower the total interest you pay over the term of your mortgage by offsetting your savings against your outstanding mortgage balance. For example, if you have savings of £20,000, and your mortgage is £200,000, you will only have to pay interest on £180,000. This could be a good option for you if you have a lot of savings. You also need to check the terms and conditions of the mortgage, as some lenders will prevent you from having instant access to your savings if you use them to offset your mortgage. Using an offset mortgage also means you will not earn any interest on your savings.

How much does it cost to remortgage?

The amount it costs you to remortgage will depend on a few factors and will heavily depend on who your current lender is, and who your new lender will be. There can be a few additional fees that you should consider when deciding if you should remortgage or not. It is always important to calculate what you could save minus the additional costs in order to see if switching will actually save you money.

Early repayment fees

If you want to remortgage before the term on your current mortgage has expired, you will often be charged an early repayment fee or exit fee. This will vary depending on your lender, so make sure you are aware of any exit fees before switching.

Arrangement fees

Most remortgages will include an arrangement fee, which apply to all new mortgages. These can sometimes be as high as £2,000. There can also be added admin fees on top of the set arrangement fee, which go towards the cost of setting up your remortgage.

Legal fees

If you want to remortgage with a new lender, you may need a solicitor to deal with any legal matters. This will also set you back with legal fees, although they can vary widely depending on who you use. However, some lenders may offer to pay for your legal fees to entice you into remortgaging with them.

Valuation

In order to remortgage, you will need to have your home valued so that the lender can see if it's worth remortgaging you. You can challenge your lender's valuation if you don't agree with it, although this comes with further fees and can often be expensive. Only challenge your lender's valuation if you are certain they have undervalued it.

How to find the best deal

In order to see if you can save money by remortgaging, you need to shop around and compare the different offers available. Make sure you calculate any long-term savings you can make by including the additional fees you will incur for leaving your current mortgage early. You can use a comparison tool to see if it's worth it. You will be asked for the amount you want to borrow, the length of time you want to borrow for and the value of your property. Any lender you remortgage with will also need to know about your financial security and your credit history. If your current mortgage term is coming to an end, try and compare the market and remortgage early to prevent you from being put on an expensive standard variable rate.

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