Should you remortgage?
Many can slash costs by switching mortgage
A remortgage is where you take out a new mortgage on a property you already own - either to replace your existing mortgage, or to borrow money against your property. Around a third of all home loans made in the UK are actually remortgages. This guide spells out when you should or shouldn't remortgage.
In this guide...
Remortgaging needs careful thought
For most people, their mortgage is their biggest financial commitment. And it follows that streamlining the largest debt can produce the largest saving - sometimes £1,000s each year. If you're the kind of person who shops around to get the cheapest television or mobile phone contract, then you're missing a trick by not using the same skills to save money on your mortgage.
But there are pros and cons to remortgaging (even more so given the unprecedented coronavirus fallout). Here we start off with talking about the reasons why you might want to remortgage, but if you want to read about the reasons why you shouldn't, you can jump straight to Why shouldn't I remortgage?
But, before you start, it's worth watching Martin's five-minute remortgage briefing, so you know about what you should be looking out for during your remortgage journey...
Originally filmed for the Daily Telegraph, and published on its website in October 2015.
Why should I remortgage?
The main reason that you might want to remortgage is to save money. And this can be big money - as site user Adrian emailed:
"My old fixed-rate mortgage came to an end two years ago and I have been waiting for the right time to set up another fixed rate and your email prompted me to do it just this week. Just saved £569.92 per month by switching from variable to fixed at 2.99% for five years with my existing mortgage lender Santander"
So, remortgaging worked for him - but will it work for you? Here are the reasons you might want to do it.
Many of the best mortgages only last a short time – often two to five years – the typical length of time offered on a fixed rate, tracker or discount mortgage.
When it comes to an end, your lender will put you on its bog standard variable rate (SVR). It’s likely to be higher than your old interest rate and higher than the best buys available. If so, you want to be ready to remortgage to a cheaper rate. Start looking around 14 weeks before your rate ends.
You want a better rate.
If you are tied into an initial deal then you might have to pay an early repayment charge which can be huge, often 2-5% of your outstanding loan. Plus, there is usually a small exit fee (it might call it an 'admin fee' or a 'deeds release fee') when you repay any mortgage.
This doesn't mean you shouldn't consider it as the savings can be huge (especially if you have a large amount of mortgage debt). You just need to do your sums before taking the plunge.
You're worried about interest rates going up.
Whoa there! Before you panic, you need to check what is meant by rates going up. If it's the Bank of England base rate that is predicted to go up (currently the rate's only 0.1%), this may affect your mortgage payments directly, depending on the type of mortgage you have. If it's the rates that new customers are being offered, then this doesn't automatically mean yours will be affected.
You want to overpay & your lender won't let you.
Perhaps you've had a pay rise or maybe you've inherited some money. You now want to pay extra but your current deal won't let you or it will only let you make a small overpayment.
A remortgage will allow you to reduce the loan size and potentially get a cheaper rate as a result. But watch out for any early repayment charges or exit fees you face, and compare this to how much you'd save with the new, lower mortgage.
You want to switch from interest-only to repayment mortgage.
You shouldn't actually need to remortgage to do this, your lender should be happy to make the change for you.
You can even change part of the loan to capital repayment and leave some on your interest-only deal, which is particularly useful for anyone with an underperforming endowment mortgage which is expected to result in a shortfall at the end of the term.
However, it's a totally different story if you want to change from capital repayment to interest only - expect your lender to be difficult if you try to do this.
Perhaps your current lender has said no to lending you extra money or the terms it's offering aren't very good. Remortgaging to a new lender might enable you to raise money cheaply on low rates. But remember to take all the fees into account to see if it really is cheaper than other forms of borrowing.
The new lender will ask you what the extra money is for. Surprisingly, it is likely to be more comfortable with you borrowing the money for a new car than for business purposes. Not so surprisingly, it won't want to lend you money to start a new business….
The most commonly acceptable reasons to raise money are for home improvements and paying off other debts. Just be prepared for your lender to ask for evidence if you are borrowing a large amount, e.g. builder quotes, or proof that you have paid off the debts.
I always shiver slightly when people talk about adding non-housing debts to their mortgage, whether it's for a new kitchen, a holiday or to consolidate existing borrowing. There are times when this could be a necessary evil, perhaps to get you out of a hole.
My problem isn't that it is wrong per se, in fact often it's a good move, but the issue is many people see it as a no-brainer solution.
Let me make something plain. Borrowing £1,000 at 5% over 20 years is more than twice as expensive as 10% over 5 years. Put that way, it suddenly doesn't seem so much of a no-brainer now does it?
You want a more flexible mortgage.
Maybe you want to be able to miss a payment. Changing jobs, going back into education, going travelling – whatever the reason, there are mortgages which will let you take payment holidays.
Or maybe you've been tempted by different, whizzy mortgages which combine your savings or current accounts with your mortgage.
Whatever flexibility you want in a mortgage, chances are it's out there. But remember products don't offer these twiddly bits for free. Expect to pay for flexible features with a slightly higher interest rate. So don't be tempted to go for bells and whistles unless you will actually use them.
If it sounds like remortgaging could be the right move for you, you want to start the search 14 weeks before you want to remortgage.
Why shouldn't I remortgage?
Your mortgage debt is really small.
Once your loan falls below a certain amount – say around £50,000 – it may not be worth switching lender simply because you are less likely to make a saving if the fees are high. In fact, some lenders won't even take on mortgages below £25,000.
Do have a look but you'll probably want to look at rates with a small fee, or no fee at all. The smaller your mortgage, the worse the effect of any fees you need to pay. Quite often, you'll be better remaining on the higher interest rate.
A large early repayment charge could mean that it'd be utter foolishness to move before the end of the incentive period. Do your sums to find out – use our 'Ditch your fix?' calculator. If it would cost too much to free yourself from your current deal, then it's all the more important that you do your homework, and be ready to move as soon as you can.
It's always worth asking your current lender to let you switch to another of its deals (ie, do a product transfer) by paying a reduced early repayment charge. You're unlikely to get to move to its top-of-the range deal but as long as it's better than the one you're currently on, and doesn't lock you in for much longer, you have nothing to lose.
It's possible that your financial position has altered since you took out your current mortgage - for instance, one of you has stopped working or you have become self-employed.
Stricter mortage rules introduced in April 2014 mean lenders MUST now see evidence of your income. New lenders may not be prepared to offer you a loan because you no longer fit their criteria, meaning you may have to stay where you are.
Your home's value has dropped.
You may have had a 10% deposit when you bought your home and got a decent mortgage, borrowing the remaining 90% of your home’s value. But now, your house price has dropped and the amount you owe is a bigger proportion. Unfortunately, you're a victim of evaporating equity, even if you have been making repayments, and that can hurt you. In some cases, you may be in negative equity, where your debt is higher than the value of the property.
The only thing you can do is sit tight, make overpayments whenever you can afford it as long as you won't be charged fees as well, and wait for prices in your area to go up again.
If you need to borrow more than 90% of the value of your property – then you'll often find it difficult to find a better rate.
Although at the time of writing, there are more mortgages at 95% than we have seen for a long time so it's worth checking to see if it's worth switching. Don't forget to check if your current lender charges an early repayment charge to leave.
You've had credit problems since taking out your last mortgage.
Since the credit crunch, lenders have become much more picky about who they lend to. The regulator, the Financial Conduct Authority, now also requires them to carefully check the mortgage is affordable, not just at current rates, but at a higher rate too, to ensure you could cope if interest rates were to rise.
As a result, lenders will want a lot of detail about your outgoings, and are looking for spotless repayment histories or at least a good, clean record of handling debts well.
It might only take one recently missed payment to your credit card, loan, mortgage, utility company...even your mobile phone to scupper your chances. Check your credit file to be sure.
You may be already on such a fantastic deal that you'd be mad to move. But don't get too comfortable – chances are it won't always be top of the tree so eventually you'll need to consider hopping onboard the remortgaging merry-go-round.
Use the Ditch your fix? calculator (even if you're not on a fixed) to work out roughly what rate you'd need to make it worthwhile remortgaging. Even if you think you've got the best deal, it's worth doing some checks so you KNOW you've got the best deal possible.