Remortgaging your home can be a great way to save money on interest payments, as well as providing you with access to additional features.
Whether you’re looking for a cheaper interest rate, want to make overpayments without penalty fees or need to switch the type of mortgage, remortgaging could be the right option for you.
In this article we look in a bit more detail at the top reasons for remortgaging, and what to look out for along the way.
What does it mean to remortgage?
Remortgaging is the process of switching to a new mortgage deal without moving home.
When you take out a mortgage deal, it typically lasts between two and five years. Many people choose to remortgage when their current mortgage deal comes to an end, avoiding their lender’s expensive default rate – known as the standard variable rate (SVR).
At this point you can choose to take a deal from your current lender or find a better offer from a new lender.
Remortgaging over to a new lender will involve making a full application and paying some fees. Because of this it’s important to check that even with the fees, the new deal leaves you financially better off.
A remortgage normally takes 4-8 weeks from when you apply.
Reasons to remortgage
People remortgage their home for a variety of reasons – to save money, access funds, or clear debt.
However, it’s important to keep in mind that remortgaging before the end of your current mortgage product could result in an ‘early repayment charge’. So make sure you plan ahead and remortgage at the right time.
Here are 8 acceptable reasons for a remortgage:
1 – Home improvements
A lot of people turn to remortgaging for the finances needed to carry out major changes like a new kitchen, bathroom suite, or an open-plan living extension.
The cost will vary according to the size of the project but will normally mean that your home has increased in value because of the improvements, particularly if you have added bedrooms or living space.
Lenders are normally quite happy to fund home improvements as it improves the property, raises the value and decreases their credit risk.
There are many different ways of improving your home, but some acceptable projects for remortgaging would include:
- loft conversion
- new kitchen
- new bathroom
- new garage
- swimming pool
- double glazing
- new car/caravan
- new roof
2 – Pay off debts
Consolidating your debts by taking out a remortgage can help to lower your overall outgoings. Credit card and loan bills can quickly mount up, particularly if the interest rates are high.
Remortgaging to consolidate multiple sources of debt, such as credit cards and personal loans, may be the right option for lots of people. However, it is important to weigh the pros and cons carefully before doing this in order to determine if this is the right decision. Although generally the interest rates on a mortgage are lower than those on unsecured loan products or credit cards, you should take into account that if the loan period is longer then you might end up paying more back overall due to the extra interest charged.
In some situations the need to reduce the amount of money spent servicing credit agreements is the number one priority, as there’s insufficient income to cope. Here, the extra cost of interest is a lower concern compared to the possibility of defaults, CCJs and maybe eventually repossession.
3 – To find a better deal
When you apply for a mortgage you choose one of the lenders interest rate deals, these will often last for 2,3 or 5 years or so.
Unless you do something when these deals expire, you will be transferred to the less attractive Standard Variable Rate (SVR).
Your existing lender will offer a range of rates that you could swap to, this is known as a mortgage product transfer. But better rates could be available elsewhere.
So our job is to search the market of over 100 lenders to find a better re-mortgage deal for you.
Additionally, you may find that your loan to value (LTV) percentage has reduced since you last applied for a mortgage. As your home will have risen in value and with a repayment mortgage the balance will reduce.
This could mean that you now ‘qualify’ for a different LTV band and gain access to even better deals. This happens because lenders reward customers with lower LTV’s as they are less of a lending risk.
4 – To borrow more money
If you have a good amount of equity in your property a remortgage is a good time to take some out via a larger mortgage. This way all of the money you borrow will be on the same special interest rate deal.
We have explained that the majority of extra borrowing is for home improvements and debt consolidation. But you are allowed to borrow money for other reasons as well.
When applying for a capital raising mortgage you will need to explain to the lender what you need the extra money for. Some things they are happy with, other things they are not so happy with!
Have a chat with one of our remortgage brokers who will explain how this works, and different lenders also have different opinions and rules.
Remortgaging can be a convenient way to access additional capital at low interest rates. Whether it’s for some extra cash-flow, a well-deserved holiday, a new car or money to enjoy life after retirement, there are plenty of reasons people remortgage. Additionally, it can also help your children get a head start in the property market or so you can pay for their wedding, or both.
5 – Second property
Remortgaging your existing home can be a great option for those who want to purchase a buy-to-let property or second property.
If the remaining balance on your main mortgage is relatively small, it might be worth considering remortgaging to release equity and use the cash to place a deposit on the additional property. This can work out much more cost effective than taking out a new mortgage, especially as buy-to-let mortgages usually have higher interest rates compared to standard mortgages.
As this new mortgage is larger than your current one, you will need provide evidence of your income and expenditure in order to prove that you are able to manage the higher monthly payments.
Do you need a deposit to remortgage?
Remortgaging a house means replacing your existing mortgage with a new one. But is there a requirement to put down a cash deposit because you are applying for a mortgage with a new lender?
6 – Separation or divorce
In the event of a relationship breakdown, selling your jointly owned home may seem like the only solution.
But if you are able to make the mortgage payments yourself, remortgaging is an option that could provide you with enough money to buy-out your ex-partner and take over the mortgage.
Most lenders allow this type of remortgage which is called a transfer of equity.
If the affordability is a bit tight then another option is to bring someone else onto the mortgage at the same time. The process would then involve removing the ex-partner and adding someone new simultaneously.
The new person will need to pass the lenders normal credit and affordability checks, as would you.
7 – Change mortgage type
While most people change their mortgage to borrow more money or to seek out a new deal, it’s also possible to move lender so that your mortgage has additional features.
- If you are considering switching from an interest-only loan to a repayment mortgage, it is likely that your lender can make the change without requiring you to remortgage.
- You may be interested in an offset mortgage which allows you to link your savings account to your mortgage and offset the savings money against your mortgage balance. This can be a great way to reduce interest payments over the course of the loan.
- To make overpayments. Nearly all mortgages now allow borrowers to make overpayments without penalties (max 10% pa). But if you have excess income that you want to put towards the mortgage it may be higher than the allowance and trigger a fee. Switching to a more amenable lender will mean that you can make larger overpayments and pay off your mortgage quicker.
- There may be a need to completely change the mortgage type, say from a residential mortgage to a buy to let or holiday let mortgage.
8 – Reduce monthly payments
As well as looking for a new mortgage deal, there maybe a financial need to make the mortgage less expensive by reducing the monthly repayments.
There’s a few ways that this can happen:
- Swap to a cheaper interest rate. This will make the payments lower for the product duration.
- Reduce the loan amount. If you have some savings then you could remortgage for a lower amount which would have lower repayments.
- Extend the term. By stretching out the mortgage term, you have longer to pay the mortgage back and this reduces the monthly payments.
- Change to interest only. Moving from a repayment mortgage to an interest only mortgage can mean a significant reduction in monthly costs.
It’s important to take expert advice before embarking on any of these options, especially if you are finding it hard to afford the repayments now.
How to get the best deal
The best deal for you depends on a variety of factors such as how much money you need to borrow and the interest rate available, which will be determined by your credit score. To ensure you get the best remortgage deal it’s important to compare products from different lenders and seek independent mortgage advice.
While many people prefer to use comparison sites and arrange their own mortgage, our advice on getting the best deal is:
- Start thinking about it around 3 months before your deal ends
- Consider what you want the new mortgage to do
- Get all of your paperwork in order; payslips, SA302, CIS statements, bank statements etc
- Call Drake Mortgages on 020 8301 7930 !
Having sufficient time to look properly at your options and research the market is key to getting the best deal and making sure you are properly informed. We have good relationships with lenders who may be able to offer a better rate than those advertised, so don’t hesitate to get in touch!
How Drake Mortgages can help
As a whole of market mortgage broker, we have access to over 100 different lenders, and thousands of mortgage products.
It’s our job to search through to find the one that’s best for you.
Don’t worry if you think your circumstances are complicated or difficult, our advisers have years of experience helping clients to successfully remortgage their homes.
Give us a call today.
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