How to Remortgage
This how to remortgage review is for homeowners and proprietors who’re looking to replace their current mortgage with a new one. As a property holder, you could be seeking a remortgage for a host of reasons.
It could be that you’re looking for a home or property loan with an interest rate lower than your existing mortgage.
Or it could be that you’re trying to combine multiple loans into a single large one to pay a lower cumulative interest. The biggest reason why most homeowners apply for a remortgage is to save upfront by paring down snowballing loan reimbursements.
In this how to remortgage guide, we will walk you through when you should be remortgaging and when not to.
We will clarify the different remortgage types, how to bag the best deal, how to prepare for remortgaging, and so on.
What is remortgaging?
A remortgage can be defined as a new loan that you apply for instead of your existing mortgage. To be specific, remortgaging entails replacing your current home loan with a new one.
You either swap the present mortgage on your property with a new loan from a new lender or take out a remortgage with better terms from your current lender.
No matter what route you take for remortgaging, the idea is to pay a lower rate of interest and thereby make substantial savings. The new home loan you substitute with your existing mortgage is referred to as a renewal when the former loan’s equity is equivalent to your current debt.
Remortgaging, which is sometimes known as refinancing, gives you an excellent opportunity to release a fair amount of your home’s equity.
Some common reasons why proprietors and homeowners apply for a remortgage are:
- To settle their existing or outstanding debts faster,
- To make the most of their home’s equity. Remortgaging lets you borrow up to the extent of almost 80% of your home’s equity or value. You can use the new home loan for consolidating your outstanding credit to lesser interest on the whole. On the other hand, a remortgage comes in handy for meeting home refurbishment expenses, paying for your children’s education, and so on.
- To get a new mortgage with a lower rate of interest compared to your current loan. The most apparent reason why you’d opt for remortgaging is to pay a lower percentage of interest than that of your existing mortgage. You can either bargain with your present lender for a better, lower rate, or look for other lenders willing to do the same.
How a remortgage works
Your remortgaging works best when you are on the verge of settling your existing home loan. A typical mortgage on a home has a term ranging from three to five years.
Once you’ve settled your current loan, you have the option of remortgaging with your present lender or negotiating with another creditor.
If you choose to remortgage prematurely, i.e., before the settlement of your existing loan, then you’ll be liable for a prepayment penalty.
Your lender’s prepayment policy, the mortgage type (variable or fixed), and the remaining term period will determine your prepayment rate.
Bear in mind that a new mortgage comes with terms and conditions that differ considerably from your previous property loan.
When should you remortgage?
If you’re like the majority of homeowners, reimbursing your home loan would be your topmost priority, as it is your most significant debt.
Towards this end, seeking a remortgage would go a long way in helping you to restructure your most considerable chunk of loan, and help make substantial savings.
However, just because you’re still paying the EMIs on your existing loan does not mean that you should apply for remortgaging.
There are some benefits and drawbacks when it comes to applying for a new home loan or remortgage. The following are some excellent reasons why remortgaging could be beneficial for you:
You’re looking for a lower rate of interest.
This is the most common reason why the majority of proprietors remortgage.
Your existing loan is on the verge of culmination
A good number of property owners apply for a new loan for their property when their existing mortgage is approaching closure.
The market value of your property has increased over time
An increase in the market value of your home makes you more eligible for remortgaging.
If you’re in a position to overpay, but your lender is not allowing you to do so, you can start looking for a creditor who’ll let you pay more than what your current provider is allowing you to.
But be careful about premature prepayment charges comparing this with the savings you’d make with your new loan.
You foresee a steep hike in interest rates
If you carefully follow the developments in the market for home loans, you could have a panic attack, the moment you foresee an interest rate hike. If the Bank of England forecasts that its base rate might go up in the days to come, then it could directly influence your mortgage repayments.
For instance, if you’re on a mortgage with a variable rate of interest, an increase in Bank of England’s base rate means that you’d have to pay a higher EMI.
The mortgage type you’re on will determine the extra amount you may have to pay every month.
You’re looking for additional borrowings
You’re looking forward to taking advantage of additional borrowing in the form of a remortgage. You are seeking an extra amount to pay for home renovations or to release some equity locked in your home.
However, the terms and conditions on which your existing lender is willing to lend you extra may not be acceptable to you.
Or, it could also be that your present lender may straightaway refuse to loan you an additional amount of money. It is during such situations that you could turn to another lender who might be willing to let you borrow a lump-sum at a low rate.
It does not need to be emphasized that your potential lender will want to know why you’d need the additional amount.
Nevertheless, do not merely assume that your new loan will work out cheaper compared to other types of remortgages.
Make sure you do the maths by considering the various fees related to the loan to establish if it is indeed more affordable than different kinds of loans.
You’re looking to shift to capital repayments from an interest-only mortgage
Your existing lender will only be too willing to enable you to switch over from an interest-only loan to capital repayments.
So, you may not have to necessarily resort to remortgaging for facilitating the swapping of the interest-only loan with a repayment mortgage.
In case the current lease is tied to an endowment insurance policy, and it is not performing as expected, then you can adopt the following strategy.
You can carve up your existing loan, altering one part into a repayment mortgage while the other component remains as an interest-only loan.
When should you not remortgage?
- Your prepayment rate is high. Use a mortgage calculator to determine if you’re breaking up your current loan for a remortgage too early that’d warrant a high prepayment. If you do so, you may end up paying much more than you can save.
- The new loan amount is very low or small. You’ll struggle to find a lender who’d be willing to lend for a mortgage under £25,000. Even if you do, you may have to pay a high rate of interest, thereby negating the very purpose of remortgaging.
- Your creditworthiness has plummeted since you took out the previous loan.
- You need to borrow over 90% of the equity on your property.
- The value of your property has gone down over time.
What remortgage type is right for you?
When you consider remortgaging, you’ll have the option of choosing from two primary forms; fixed-rate and variable-rate mortgages.
A fixed-rate mortgage, as the term indicates, requires you to pay a flat rate of interest for the entire duration of the loan.
A variable-rate loan, on the other hand, necessitates an EMI payment that could vary over time.
Variable-rate mortgages can also take the form of a capped rate mortgage, discounted rate mortgage, or tracker loan. You can discuss with your current or prospective lender to understand the type of remortgage that’d be appropriate for you.
Improving your chances of getting the best remortgage deal
Never take for granted that you’ll be eligible for the remortgage type you’re seeking. That said, you can use the following:
Verify your credit report
Lenders, to establish whether you’re eligible for a mortgage, will first go through your credit report.
A credit report contains details about your credit history- whether you’ve taken out loans in the past and if you repaid them. You’d want your credit report to look good so you will receive a loan at a low rate.
Get about organizing
After you receive the credit report from TransUnion, Experian, or Equifax-ensure that it is perfect.
In other words, make sure there aren’t any unpaid debts, identity theft, outdated information, errors committed by your lender, and so on. Check your credit report every six months to ensure your creditworthiness to a potential lender.
Set about improving your credit score
The higher your credit score, the better are your chances of qualifying for a loan at a lower rate.
Do your homework
Take your time researching different types of loans, lenders, and agents or brokers before making a decision.
Make up your mind on the mortgage type that’ll be suitable for you
It is for you to decide whether you’ll be more comfortable with a fixed or variable-rate mortgage.
Fees associated with your remortgage deal
While reviewing the savings, you could make from a remortgage, take into account the remortgaging charges or fees. Remortgaging costs usually include valuation, administration, legal, and arrangement fees.
Find a great deal on your next mortgage
Whatever term suits your budget we can help you find a solution. Ratewise can match you with a local broker that knows how to help—regardless of your credit score! Get pre-approved today.
Can I remortgage with bad credit?
You can remortgage with bad credit, although you may not get as good of a deal as you would if you were applying with a higher credit score.
Your lender may charge a higher interest rate so consider taking a few months to raise your score before you apply.
How much does remortgaging cost?
The cost of remortgaging includes legal fees of around $1,000 to set up your new deal. If you have a high mortgage balance still, your new lender may help you cover the fees.
How do you remortgage?
To remortgage, you switch from one mortgage lender to another. You would need to apply to remortgage with the new lender and be approved.
Remortgaging is only worth it when you can get a better interest rate than what you already have.
Why should I remortgage?
You should remortgage if you are unhappy with your current mortgage terms or interest rate. Remortgaging can potentially get you a cheaper rate and save you money in the long run.