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How does remortgaging work?

January 27, 2021
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If you already own a home, you may reach a point where you think about remortgaging. Securing your first mortgage allows you to move into the home, but remortgaging a home is essentially just moving borrowing to a different lender to secure a better deal.

Some lenders will allow you to use the opportunity to release some equity from your home. You might do this to carry out some home improvements, clear your debts or take an expensive holiday. Sometimes, remortgaging will allow you to secure a better deal on your mortgage. 

With more equity in your home, you will be in a better position than when you first bought your home and only had your deposit. This gives you some bargaining power and allows you to move to a different lender to get a better deal.

Lenders are keen to attract borrowers from their competitors. This means you can shop around for a better deal and adjust your mortgage to your current financial situation. While some people are happy to keep paying their mortgage for longer if they have smaller monthly payments, others will be keen to make overpayments and reduce the term – and overall cost – of their mortgage.

These are all achievable by remortgaging your property, but you will need to understand the process first. In some situations, you could be worse off by remortgaging, so it’s important to speak to the experts before making any big decisions.

How does remortgaging work?

Remortgaging is a lot like securing your first mortgage, but this time, you can also take into consideration the equity you have already built up in your home. This might allow you to secure a better deal.

Sometimes it pays to switch, and sometimes it doesn’t. You need to look at the size of the outstanding mortgage and then think about how much it will cost to switch. Many lenders will charge something known as an arrangement fee, which can wipe out your chances of making any savings.

You apply for remortgage in the same way you would apply for a first mortgage. Lenders will look at your financial situation, your recent financial behaviour, and your current employment. If your financial position has changed significantly, you might be unable to remortgage.

How does the value of your home impact the remortgage process?

The value of your home may have changed significantly since you first moved in. You may have renovated the property, or you may have moved into an up-and-coming area. Lenders will always want to check the value of the property hasn’t fallen since you purchased it, but an increase in value can work in your favour.

In the case of falling property prices, if you are left with negative equity, you will be unable to remortgage without investing more in the property. Some structural issues may also make it difficult to secure a remortgage.

In many cases, lenders will conduct a valuation from the curbside, so you will need to tell them about any changes made to the interior that will increase the value. If similar properties have sold in the area for significantly more, you can send details to the lender.

If the value of your home has increased, this can be good news for you as it means you are applying for a mortgage with a smaller LTV. If you remortgage and are unable to keep up with the repayments, the lender will be able to sell your home for a higher price. This gives them added security.

Remortgaging to lower your costs

If your fixed-rate mortgage has come to an end, you might be interested in remortgaging to help secure your finances. A variable rate mortgage might not be suitable for those who like to be able to budget. While the chance of lower interest rates may be tempting, a rise in the interest rates could make some lending products unaffordable.

Another way to make your mortgage more affordable in the short-term would be to remortgage for a similar term to your original mortgage. With more equity built up in your favour, you could spread out the payments over another 25 years, resulting in lower monthly payments. Remember that longer terms will increase the total amount of interest you will have to pay.

Try this Calculator

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You could save up to:
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per year on your mortgage.
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This is based on a new 2-year fixed rate mortgage with an interest rate of 1.15%.

Remortgage Calculator Provided by Niche Mortgage Info.

Remortgaging for flexibility

Many people find they are in a better financial position a few years into their mortgage repayment schedule. This might be down to greater financial security, lower mortgage payments when compared to rental payments, or making career progress. When you are in a better financial position, you might find that you want to be able to make overpayments to clear your mortgage faster.

Not all mortgages allow you to do this, so you may wish to remortgage to be able to make overpayments. There are also options to use a savings account to temporarily freeze your interest payments. Provided you don’t touch the savings, you can offset the interest, but the savings will always be there if needed.

Remortgaging for stability

Some people will use remortgaging to release some equity from their home. By borrowing a little more than you need, you could clear your outstanding debts and start with a clean slate. This can be helpful, but you must pay close attention to the long-term cost.

While mortgages are offered at much better rates than overdrafts and credit cards, you could end up paying back a lot more over the term of the loan. Remortgaging to clear your debt should be a last resort, as it can put you in a worse financial position in the long-term.

What are the disadvantages of remortgaging?

There are a few disadvantages that you need to think about before moving forward.

  • If your financial position has changed for the worse, or if you have recently become self-employed, you might struggle to remortgage. This is why it is important to select a mortgage product that will always be affordable, as no one knows what the future holds.
  • By stretching your debts over a longer time frame, you are increasing the overall amount you pay for your home. While you might only be concerned about your monthly repayments, it’s important to think about the lifetime value of the loan.
  • Many remortgage products come with fees. This can cancel out any savings you could be making in the long and short term, so make sure you understand the full cost before moving forward.
  • By extending the term of your loan, you are extending the period that your home may be repossessed if you are unable to keep up with the payments. When the finish line is in sight, it makes sense to pay off the mortgage rather than remortgage for short-term gains.

What happens when you remortgage?

Remortgaging is simply moving your borrowing from one lender to another. You will continue to live in your home and will own the same amount of equity unless you decide to release some. As this is only a financial arrangement with your lender, you will not need to go through the process of conveyancing again. However, you may need to arrange a valuation of your home.

Working with a broker to remortgage

Understanding if you would be in a better or worse financial position after remortgaging can be difficult to get your head around. This is where working with a mortgage broker can help. Not only will they have access to all of the latest lending products, but they will also be able to guide you towards the lenders most likely to accept your application.

A mortgage broker can help you to navigate the best deals out there and determine which ones offer value for money. Start by being honest with your broker about what you are hoping to achieve. If you simply want to lower your monthly costs by any means necessary, they can help you achieve this. But if you are determined to pay back your loan as quickly as possible, they can help you find a lender that allows overpayment. If you don't know what ask, see our previous posts

Remortgaging to buy a second property

If you have built some equity in one property, it is not uncommon to use this to purchase another property. This is popular among property developers to help manage their finances. You might want a small property in a city where you work, or you might be looking for a holiday property in the countryside.

It’s important, to be honest with the lender about the purpose of the second property. If you are buying a holiday residence, they might scrutinise your finances more than if you are purchasing a second property as a buy-to-let investment. This is because the buy-to-let property will be expected to generate some income which will offset the mortgage payments.

Again, working with a mortgage broker will help you to determine the best course of action for your circumstances. Since you will be making a financial decision that could impact your life for the next 20 years, it makes sense to get some guidance and support along the way.

 

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