How Does Remortaging Work ?
A remortgage is a new mortgage that you use to pay back your former mortgage on a home. Simply put, the method of converting an existing mortgage into a new mortgage contract is a remortgage. It might either entail the same mortgage provider or a different one.
Reasons for Remortgaging a House
Remortgaging is the method of transferring the mortgage from one lender to another, or getting a new and better mortgage deal from the same lender at the expiration of an existing mortgage.
There are four key reasons to do this:
- Lower your monthly repayments by getting a cheaper mortgage
- Release any of the equity built up in your properties for other investments, such as home repairs or debt repayments
- Reduce monthly repayments by stretching the mortgage period, which ensures that it may take longer to repay the loan but at lesser monthly repayments
- To reduce the mortgage term, either by finding a new lender willing to carry the mortgage or negotiating a better deal with your current provider
Buying an investment property on its own can be a hassle. On the other hand, getting the financing can be a huge deal on its own.
You need to look for better deals than your present mortgage when you are remortgaging to purchase another home. Many property buyers are searching for a more stable mortgage and even smaller rates on mortgages. It is critical that you get better terms out of the remortgage cycle than your previous mortgage, otherwise the whole purpose of remortgaging is defeated.
How to Remortgage
Banks and building societies have tightened their mortgage lending requirements due to the credit crisis. They now usually seek deposits of between 15% to 20% before considering your application for remortgage, and a 40% deposit would increase your options even more, and enabling you to find deals at a lower interest rate.
If your original mortgage has been taken out with a small deposit or no deposit, you may find that there is not enough (or any) equity to remortgage. If you can move or are thinking of remortgaging, here’s what you should do.
Step One: Get your paperwork together
Before your current deal expires, you should start thinking about remortgaging.
Examine your existing mortgage and bank statements to see how much you are paying for your existing loan. If your contract is a tracker or other variable rate plan, it’s probably gone down in the last few months so you may want to check how much you paid before prices start to fall and so you have an idea how much you can afford to pay every month.
Step Two: Find out how much it will cost you to move
Check your small print for any early reimbursement (ERC) charges – particularly on discounted, fixed, cashback or limited offers – that can make reimbursement too costly.
Notice also the exit fee, which is paid by a lender for closing your mortgage (this includes releasing the deeds and the costs of land registration). Call your lender to get a quote for paying off the money that you owe, plus any fees.
Step Three: Be aware of your loan’s limitations
Do not presume ERCs will stop immediately when your fixed or discount rate expires – some loans have overhanging tie-ups. You may find that after the initial deal ends, you need to pay the lender’s standard variable rate (SVR) for a set period. This is not necessarily a bad thing when interest rates are low, as some SVRs are cheaper than fixed mortgage rates offered.
Step Four: Find a mortgage you want
Decide the type of product – a fixed rate, tracker, or variable rate you want. Then follow through on a contract. Speak directly to lenders, use the best-buy tables on the newspaper’s financial pages, or use a comparison website.
If you don’t want to do the research on your own, you can use a mortgage broker. Bear in mind that some lenders may not offer the best rates through brokers, or that the charges that be higher when they do. But if you have a small deposit, are self-employed or have a poor credit record a broker can be very helpful.
Step Five: Work out what fees are involved
The contract you want to move to may not come cheap – you will need to pay legal fees, application / arrangement fees and an appraisal fee.
Step Six: Ask your lender to match or better your chosen deal
Even if you like the look you have selected for the new contract you will need to see if your current lender is able to equal it. If it provides something similar, switching to that would save you time and hassle – so you will save money too.
Step Seven: Apply for the new deal
If there isn’t anything worth keeping with your current lender, you need to apply for the new offer you find. Typically speaking, you can do so about three months before your current exclusive rate of offer expires. It’s worth thinking about early, because if you’re turned down you have a chance to look elsewhere. It also means you increase the equity you have as a deposit at a time when house prices are falling.
In terms of lower lease costs and the rate of interest you have to spend for your mortgage, remortgaging offers a lot of financial advantages.
While remortgaging has long-term financial benefits, you can incur some expenses as you transfer. Before you can leave, some mortgage lenders demand what’s called an early repayment or withdrawal fee, so it is crucial you determine correctly whether or not you will save when you remortgage.
If you are not sure of your options, hiring a mortgage advisor or broker may be a good idea.
If you are remortgaging your house, the advice of a legal expert is almost always necessary. The exception is if the remortgage is very simple – for example, you remain with the same lender and you only move to a new product.
Otherwise, a remortgage needs a lot of legal work, and includes a forwarding solicitor.
Depending on the lender, the location of your home and the sum you borrow, closing costs for a refinancing will vary between 3–6% of the loan amount. And if the loan amount was £100,000, you would end up paying at least £3,000 in fees.
You can think about refinancing your mortgage if it means you are looking for a lower interest rate at a fixed rate or reducing the length of your mortgage term. For the reasons we mentioned above, the money you might gain by doing so could be used to help address the important issues, such as paying down debt or preparing for retirement.
It is a smart idea to refinance because it lets you gain charge of your monthly bills. If you have more money to put into being completely debt-free you will feel more comfortable going forward.
Yet there are times when it would not be a smart idea to refinance your mortgage. Refinancing (and going into more debt) wouldn’t be smart, whether you want to remodel your kitchen, you want to buy a new car or you want to pay off credit card bills. Wiping out your home equity to buy new items you don’t need puts your home at risk — especially if you lose your job or face other financial hardships.
You may be forced to pay an exit or early repayment fee if you leave your current mortgage provider. You’ll need to consult with them to see exactly what to expect.
Your credit rating will affect the lender’s decision whether to approve your application for remortgage or not. If you have a bad credit rating, that can affect your application’s performance.
You can find out what your credit rating is through contacting credit reporting agencies like CallCredit, Equifax or Experian that will give you a credit report for a fee. However, if you’re consistent with your payments for anything from credit cards to energy and telephone bills, then you’re likely to get a decent credit rating.