Remortgage

Something to think about?

To remortgage a property is to take out a new mortgage to replace the existing one before it has been fully paid off. Many people have found that they can make really substantial savings, worth thousands of pounds per year, by taking out second mortgages with a lower interest rate than their current home loan.

Who might want to take out this kind of mortgage on a property?

When moving to a bigger house, some mortgages are more portable and can be taken over. Usually however; if you are moving to a more expensive home, you will require a larger mortgage so you will want to shop around for better rates and offers.

Some people may want to increase their monthly payments in order to pay off their mortgage earlier. For example, an individual might just have received a pay increase or have inherited some money. Getting a remortgage from a lender like Halifax or Abbey may be the best way to set this up.

Many people take out mortgages where the interest rate is fixed for the first 2 or 3 years. When that period comes to the end, it is often a good time to explore the best deals out there.

Consolidating other forms of debt: Many people have bank loans or credit card debts with high rates of interest. For some it is sensible to pay off all those loans by getting a larger Natwest mortgage that can then be paid off at a much lower rate of interest. The downside of taking out such a loan is that although the interest rates may be lower, the length of time for paying off those debts is likely to be extended. Paying off a loan at 9% interest over 10 years is likely to be less expensive than paying off a loan at 3.5% over 20 years. Short term gain may mean a higher overall cost.

When a new loan is not possible or not a good idea

Early Redemption Charges (ERC): If you are on a fixed interest mortgage you may be charged a very expensive fee if you take out a new home loan before the fixed term has expired. Some lenders will charge an ERC even if you pay off your original mortgage after the fixed term has expired.

Owning less than 25% of the property’s value Since the credit crunch period a few years ago, it has become much more difficult to sign up for another mortgage if your equity in the property is less than 25%. Many lenders like HSBC or Northern Rock will only offer a loan where the Loan To Value (LTV) – the proportion of the loan to the value of the house is 75% or less. The lowest interest rates may only be available when the LTV is 60% or less. Where there has been a substantial fall in property prices some borrowers have found their equity in the property has fallen and that the LRV has risen well above 75%. In these cases borrowers are unlikely to receive any new loans.

Borrowers with poor credit ratings: Receiving a second mortgage with bad credit can be difficult. Most individuals in this state have to stay with their current mortgage provider.

Borrowers with very small mortgages: Many lenders are not interested in providing mortgages of less than 50,000. Those whose mortgages are almost completely paid off are unlikely candidates for a new home loan.

Already on a good Standard Variable Rate (SVR): Some borrowers opt to pay the SVR from the start while others automatically switch to SVR on the expiry of their fixed interest term. In recent years with the interest rates very low, it may be that your current lender offers a very competitive SVR so it may not be worth the expense and hassle of getting a new mortgage.

Types of mortgages

To see some of the types of mortgages which are available, take a look at the Mortgage Rates page on this website.

Costs fees and charges

Shopping around or getting a mortgage broker to do the job for you may net you a deal that provides you with a much better rate of interest and therefore much lower monthly payments. However; there will be significant fees and charges to pay on many loan deals and these have to be factored into the calculations on how much you have to pay. These fees include:

Early Repayment Charge (ERC): See above

Mortgage exit administration fee: These are administrative and staffing fees that your existing lender can charge for bringing your existing mortgage to an end.

Arrangement fees: An administration fee charged by the new lender can range from 500 to 1.5-2% of the mortgage value, which could come out to be thousands of pounds. These fees can often be added to the total mortgage amount that may seem a good idea at the time, but which will mean you are paying interest on this fee for years to come.

Utilize an online calculator

This arrangement is good for lenders as their base interest rates look good on mortgage comparison best-buy sites, but prices actually are higher than the tables show because of these charges. Borrowers wanting the best deals should not just look at the rate offers, but should also factor in these extra charges when using a calculator to work out what the actual monthly payments are likely to be.

To see how a mortgage calculator works, see the page Mortgage Calculator on this site.

Reservation fee: Some lenders charge a reservation fee when setting up for you a fixed interest mortgage.

Valuation fees: All lenders will get a surveyor to value the property. A borrower seeking a second house loan from the bank will have to pay for this.

Legal fees: Any additional mortgage will mean using a solicitor that the borrower will have to pay for.

Advice – mortgage brokers

Many people looking for a new mortgage use a broker to obtain the best deal possible. Most people do not have the time or the expertise to find the best offers on the market. Some lenders will also only offer home loans through mortgage brokers.

Mortgage brokers will charge a commission for their services, usually 0.3% to 0.5% of the mortgage amount. Take this into account when selecting an option.

Summary

Any decision on whether to get a remortgage can only be made after two issues have been examined:

What are the anticipated costs going to be if you stay with your current mortgage?

What are the costs, including fees and charges, going to be if you get a new home loan?

Don’t just look at the headline interest rates on the offer. Get proper advice before you commit yourself.

This document does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice.