How Does Remortgaging Work?
The mortgage market can be complex, with various deals and options available. For those looking to remortgage their property, understanding the process and options is essential. Remortgaging is the process of switching from one mortgage deal to another, either with your current mortgage provider or a different lender.
In this article, we'll discuss how remortgaging works and the various factors to consider.
It’s just as important to regularly review the best deal when you remortgage as when you first take out a mortgage. If you don’t take the time to regularly review what deals are available, then you may end up paying a lot more than necessary.
If you are approaching the end of your mortgage term then it’s a good time to start thinking about your next move, or if you do nothing then you’ll end up paying a lot more in payments and interest than you should.
It’s suggested that you start actively looking for a new mortgage about 6 months before your current deal ends. As your mortgage is likely your biggest expense, it’s important to make sure you’re on the right deal for you.
It’s always best to have a new mortgage in place that will start as soon as your previous deal ends to avoid any risk of paying a more higher interest rate.
Stages of Remortgaging
There are several stages to the remortgage process:
If you already have a mortgage advisor, they should be in touch with you a few months before your current deal ends. If you don’t have one, it’s a good to look for one around nine months before your deal ends.
You’ll need to have your relevant paperwork to provide your advisor including current mortgage, income, plans for the future etc.
The advisor will then help you find relevant deal options for you
Once chosen a deal, the advisor will make the application for you
The lender will underwrite the mortgage and instruct a valuation to ensure the property is worth what you intend to borrow
Once confirmed, you’ll be issued the mortgage offer
Your solicitor will finish your paperwork and then you’ll be ready to switch to your new deal
Key Factors to Consider:
Interest Rates on Mortgage Deals
When considering a remortgage deal, it's important to shop around different mortgage providers to find the best offer. Different lenders will offer various rates and fees, and it's important to factor in these costs when deciding on a deal. The interest rate on the remortgage will determine the cost of borrowing and the overall repayment amount.
It's essential to ensure that the new deal offers a lower interest rate than the existing mortgage rate to make remortgaging worthwhile.
New Lender or Existing Lender
Choosing a mortgage lender is an important decision when remortgaging. Different lenders will offer different deals and have varying criteria for lending. It's essential to ensure that the chosen lender is willing to lend on the specific property and that the deal meets your personal circumstances including your financial circumstances.
It may seem like an easier option for you to remortgage with your existing lender. Sometimes, it may be the best option for you. However, you need to weigh up both options for your circumstances as both have pros and cons for you to take into consideration.
Remortgaging with the same lender
You could save money initially as you may not need to pay a valuation fee and you may not need a solicitor, so you’ll save on those costs. Also, if you’re remortgaging before your lock-in period ends, your current lender may also waive any early repayment charges (ERCs).
These charges could be in the hundreds or thousands of pounds, depending on the percentage of outstanding mortgage charged and years left on the mortgage term.
Remortgaging with a new mortgage broker
You could save money by being offered a better mortgage elsewhere. It’s always worth shopping around. You could get better terms especially if you were a first time buyer on your first mortgage.
You may get a more up-to-date valuation. Your current lender will probably base their valuation on what they assume your property is worth, and may not even visit it.
Credit
The lender will require certain documents and information to assess the borrower's creditworthiness, including credit rating, credit history and credit score. This will include an Agreement in Principle, which is a document that outlines the amount of credit the borrower can obtain.
The lender will also require details of the borrower's finances, including income, expenses, and other debts.
It's essential to ensure that all the necessary documents are provided to the lender to avoid delays or rejection of the remortgage application.
Interest
The current market is influenced by various factors that impact the interest rates offered on remortgage deals. These factors include the discount rate set by the Bank of England, the overall state of the economy, and the demand for credit.
It's essential to keep track of these factors when considering a new mortgage deal to ensure that the borrower gets the best possible rate.
Equity
Equity is the difference between the current market value of a property and the outstanding mortgage balance.
If the property value has increased since the original mortgage was taken out, the borrower may have built up equity. This equity can be used to access lower interest rates and better remortgage deals.
However, if the borrower has negative equity, meaning the property value has decreased since the mortgage was taken out, it may be more challenging to find a good deal.
This is where loan-to-value (LTV) comes into play. LTV is the size of your mortgage compared to your property's value. If your home is worth £200k and your outstanding mortgage is £150k, your LTV is 75%.
The lower your LTV, the wider your choice of deals. You might want a more flexible mortgage deal that allows you to make overpayments (additional payments above your monthly mortgage payment) without penalties as you chase that sweet mortgage-free life.
Mortgage Deal Terms
When remortgaging, borrowers should consider the term of the new mortgage deal. If the borrower wants to pay off the mortgage faster, they may want to choose a shorter term. However, this may result in higher monthly payments.
Conversely, choosing a longer-term may result in lower monthly payments but more interest paid over the term of the mortgage.
Fees
Your mortgage is likely to be your biggest financial commitment, and many people don't appreciate the sheer cost of their mortgage in interest over its lifetime. When it comes to remortgaging, there are also costs that you need to keep in mind and it depends on your current loan and the deal you’re moving into.
When considering a remortgage deal, borrowers should be aware of any fees associated with switching lenders or deals. These may include booking fees, arrangement fees, valuation fees, legal fees and potential exit fees from the current mortgage.
These fees can add up and all the costs should be factored into the overall cost of the remortgage.
Flexibility
Borrowers should consider the flexibility of the remortgage deal, including the ability to overpay or underpay, make lump sum payments, or take payment holidays. Having these options can help borrowers manage their mortgage payments and pay off the mortgage faster.
Early Repayment Charge
Some remortgage deals may have early repayment charges if the borrower wants to switch or pay off the mortgage before the end of the term, whether its a new lender or your current lender. It's essential to check the terms of the remortgage deal to avoid any unexpected fees or charges.
Conclusion
In conclusion, remortgaging can be an effective way to save money on a new and better deal. It may seem complex and daunting at first, but by preparing well-in-time, you can not only find a better deal but also end up saving more money and make lower monthly repayments than your current mortgage deal.
You'll be pleasantly surprised by calculating how much you could save.
By shopping around for the best deal, choosing the right lender, providing the necessary credit documents, and keeping track of interest rates, borrowers can make the most of the mortgage market and save money on their property.
However, it's important to consider the costs of remortgaging and factor these in when deciding whether to switch to a new deal from your existing deal.
