Remortgaging can seem like an overwhelming prospect, especially if you’re not sure what you’re allowed to do.
However, there are several acceptable reasons to switch your mortgage that can make remortgaging a smart choice. In this article, we’ll explore some popular reasons why people remortgage, and by the end, you’ll have a better understanding of when it might be an acceptable option for you.
What is a remortgage?
A remortgage is a process whereby you switch your existing mortgage to a new lender, or to the same lender but with different terms. The aim is usually to get a better rate of interest and reduce monthly repayments, though some people do remortgage to access equity built up in their property.
When you remortgage, you are essentially taking out a new loan secured against the value of your home. The amount you can borrow will depend on your financial status, credit score and the equity available in your home.
Your current lender may offer you a better deal than other lenders, so it’s important to compare all options before making a decision. This is called a mortgage product transfer.
Reasons to remortgage
There are several acceptable reasons why homeowners may choose to remortgage their property.
These include:
Lower interest rates: One of the most common reasons to remortgage is to take advantage of lower interest rates. If you’re currently on a fixed-rate mortgage and the term is coming to an end, you may be able to find a better deal by switching to a new lender or product. Even a small reduction in interest rates could save you thousands of pounds over the term of your mortgage.
Improved loan to value: If your home has gone up in value then your loan to value percentage will now be lower than before. A remortgage could allow you to benefit from the increased value as you may now be eligible for the lower LTV rates.
Home improvements: Another acceptable reason is to fund home improvements via a capital raising remortgage. By remortgaging, you may be able to release equity from your property and use the funds to make renovations or extensions. This can not only improve your living space but may also increase the value of your property in the long run.
Debt consolidation: If you have multiple debts, you may be able to consolidate them by remortgaging. This involves taking out a new mortgage that’s large enough to pay off your existing debts, leaving you with just one monthly repayment to make. By consolidating your debts, you could potentially lower your monthly payments and simplify your finances. This article answers the question: What does debt consolidation mean?
Change in personal circumstances: Your circumstances may change over time, which could make remortgaging an acceptable option. For example, if you’ve had a change in income, you may want to switch to a mortgage with lower monthly repayments. Alternatively, if you’re approaching retirement, you may want to switch to a product with a shorter term to ensure your mortgage is paid off before you retire.
To buy a castle: Rather than investing in a vanilla buy to let, some investors are releasing capital to buy castles. After renovation these can be used as a second property, your own home or as a business venture. You’ll need lots of cash and a castle mortgage to achieve this. A mixed-use mortgage is required where the investment property has a commercial element as well as residential accommodation.
Divorce or separation: Remortgaging can also be an acceptable option in the event of a divorce or separation. If one partner is taking over the property, you may need to remortgage to release equity that was built up during your relationship. This is known as a transfer of equity.
Change the mortgage type: If you plan on renting out your own home then you will need to switch to a different type of mortgage. This is because a standard residential mortgage does not permit this. Changing over to a buy to let mortgage will then allow you to let it out.
The process explained
Remortgaging your home is a relatively straightforward process, and much simpler than moving house!
You first need to find a decent mortgage deal, your mortgage broker can help with this. Independent brokers will have access to thousands of deals, so they’re sure to find the right one.
Then it’s time to apply to a new lender. You will need to complete a mortgage application as well as provide proof of ID, address and income etc.
All the usual stuff.
Is a remortgage based on your income? – Yes and proof will be required.
During the underwriting phase, the lender will check your credit records and request a valuation of your property. This may require a physical visit to your property, although many are now done virtually using local property data.
There is a small amount of legal work required, and your solicitor will do much of this while the lender is assessing your application.
Can you release equity on a fixed rate mortgage? In theory this is possible, but if you need to remortgage be aware of any ERC or exit fees.
Once complete, you will receive the mortgage offer, which details how much you can borrow and on what terms.
How to get the best deal
If you’re considering remortgaging, it’s important to do your research and shop around to ensure you’re getting the best deal for your circumstances.
Here are some tips to help you get started:
- Check your credit score: Your credit score plays a significant role in the interest rate you’re offered on your mortgage. Check your credit score before applying for a remortgage, and take steps to improve it if necessary.
- Compare deals: Use a comparison site or speak to a mortgage broker to compare deals from different lenders. Look for products with lower interest rates, lower fees, and flexible repayment terms.
- Negotiate with your current lender: If you’re happy with your current lender, it’s worth negotiating with them to see if they can offer you a better deal. They may be willing to match or beat the offers you’ve received from other lenders.
- Consider the total cost: When comparing deals, it’s important to consider the total cost of the mortgage over its term. This includes not only the interest rate but also any fees associated with the mortgage.
- Seek professional advice: Speak to a mortgage advisor or financial advisor to get expert advice on the best deal for your circumstances. They can help you navigate the complex mortgage market and find a product that meets your needs.
- Be prepared for the application process: Once you’ve found a mortgage deal that you’re happy with, be prepared for the application process. This will typically involve providing financial information, proof of income, and details about your property. Make sure you have all the necessary documentation and information ready to speed up the process.
Things to be aware of
While remortgaging can be a smart financial move, there are some things to be aware of before you make the decision.
These include:
Fees: Remortgaging can come with fees, such as valuation fees, arrangement fees, and legal fees. Make sure you’re aware of all the costs involved before you apply for a remortgage.
Early repayment charges: If you’re currently on a fixed-rate mortgage and want to remortgage before the term is up, you may be subject to early repayment charges. Make sure you check your current mortgage terms and conditions to see if this applies to you.
Remortgage deposit: Ordinarily, you won’t need a deposit for a remortgage application. The equity in your home is usually sufficient. But occasionally it may be necessary to add some cash to improve the availability of deals and lenders.
Length of the mortgage term: If you’re considering a longer mortgage term to reduce your monthly payments, remember that this will also mean paying more interest over the term of the mortgage. Consider whether this is a trade-off you’re willing to make. If the term takes you over 65 then this will be classed as borrowing into retirement and the lender will ask about your pension income.
Risk of negative equity: If you’re releasing equity from your property, there’s a risk that the value of your property may fall in the future. This could mean that you owe more on your mortgage than your property is worth, which is known as negative equity.
The six month mortgage rule: This affects a small minority of people who want to remortgage within the first six months of ownership. They will be caught by the six month mortgage rule which is enforced by some lenders. If so, you will need to get a day one remortgage lender.
Remember, remortgaging is a big financial decision and mistakes will be costly to rectify at a later date.
So take the time to do your research and seek professional advice from a remortgage broker.
