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Guide to remortgaging

Guide to remortgaging

Remortgaging  can be a big decision, so we’ve put together this guide to help you weigh up the pros and cons.

Tobi Owens
From the Mortgages team
minute read
posted 6 JANUARY 2020

What is remortgaging?

It’s when you take out another mortgage to replace the existing one you have on your current home (it’s not the same as taking out a  second mortgage). Some of the reasons for wanting to remortgage include:

  • To save money on your current mortgage
  • To get a mortgage better suited to your needs
  • To raise more money, using the equity in your home as security.

Of course, there may be other reasons why you might consider remortgaging but, whatever they are, it’s important to think about all the factors. After all, your mortgage is one of the biggest financial commitments you’ll probably ever make.

Why should I remortgage?

  • One of the main benefits of remortgaging is to save money, and it might be the next logical step if your current deal is about to come to an end. Many mortgage deals offer an attractive interest rate for a limited period of time, such as two, three or five years. If your deal is coming to an end and you don’t look at remortgaging, your lender will simply transfer your agreement to their standard variable rate mortgage (SVR) – and these rarely offer the best interest rates.
  • Even if your existing mortgage hasn’t come to an end, you may have seen a better rate elsewhere. In this instance, it’s important to do your sums and consider any penalty fees you might have to pay for leaving your current mortgage contract early. Make sure you also factor in arrangement fees for your new mortgage. With all this in mind, you might come to the conclusion that you’re better off with your current provider until your particular deal comes to an end.
  • You might find that your circumstances have changed – perhaps a pay rise has meant that you can afford to (and want to) increase your monthly repayments but the terms of your existing mortgage won’t let you do that. Again, it’s worth checking that the numbers stack up and that any exit and arrangement fees don’t eat up potential savings.
  • You may decide to remortgage your home in order to raise funds – such as for major home improvements. If you do this, you should be absolutely confident that you can meet any increased repayments. If you can’t, you risk your home being repossessed by the lender.

How does remortgaging work?

In essence, you’re borrowing money from one lender to pay back another (unless you’re remortgaging with your existing lender), but the aim is to reap the benefits by doing so – such as lower repayments, more flexibility or to gain extra funds.

For example:
Your mortgage term is 25 years and you have £150,000 outstanding. You’ve been on a fixed rate of 3% for the past five years but that deal is coming to an end. The remaining 20 years of your mortgage will revert to the provider’s standard variable rate and this will increase your monthly mortgage payments.

Rather than move to the provider’s SVR, you find another provider offering a fixed rate of, say 3%, and decide to remortgage your home for the remaining £150,000 with them.

The amount you borrow is used to pay off your previous mortgage in full. You then start making repayments on your new mortgage provider, initially at the new fixed rate. You could set the term of your new mortgage to 20 years to match the remaining term on the previous mortgage or you could reduce or potentially extend the term to suit your circumstances.

Can I remortgage with a bad credit rating?

If your credit score has decreased since taking out your mortgage, it’s not always advisable or possible to remortgage. That’s because your  reduced credit rating could mean lenders see you as a greater risk and you may be unlikely to find any deals that offer better rates than the agreement you already have.

If this sounds like your situation, then it might be better to stick with your existing lender until your credit score starts to improve. Alternatively, you could complete an agreement in principle, which confirms how much a mortgage provider would be prepared to lend you, to see if you would be eligible to remortgage.

How to build your credit score

When shouldn’t I remortgage?

You should always think carefully about why you want to remortgage. Ultimately, by remortgaging, you should be better off than you were before – whether that means smaller repayments or paying off your mortgage quicker.

If you’re considering remortgaging in order to raise extra money, then think about whether there are any other ways of doing so. Perhaps a  loan or a  credit card  would be a sufficient and wiser way to borrow than remortgaging.

How to remortgage

If you decided that remortgaging is the best option, then you need to think about what sort of mortgage you want, whether that’s one with a fixed  or variable interest rate.

It’s a good idea to have your home revalued before you start the process of remortgaging. You may find that it’s increased in value, in which case you could find yourself in a more advantageous position, as your loan to value ratio (LTV) will have decreased (assuming you don’t want to raise additional funds).

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