Should I Remortgage?
With historically low-interest rates and somewhat high inflation, thousands of people are choosing to remortgage their properties to save money and create stability. But what is remortgaging? And how can it benefit you?
What is remortgaging
Remortgaging refers to the act of changing your mortgage or taking out a second mortgage. In most cases, it’s essentially taking advantage of low market rates to save money on existing debt or to create debt to fund something.
Why can remortgaging save you money?
When you change your mortgage, you can choose one with a lower overall rate, which would reduce your monthly expenditure, the aim is to choose a more suitable mortgage for you. In addition, If you are on a repayment mortgage and you have kept up with all repayments then you should have more money stored up in the property (equity), and provided the house value has stayed the same or increased you should have a lower LTV. This means you may be eligible for rates that you weren’t before because you essentially have more invested in the property.
A lower LTV is important to lenders because it indicates reduced risk. They’re more likely to be able to get their money back because they can reclaim their costs from the property (including the cost of selling and the cost of selling it quickly). As a result, they typically offer the lowest rates to those who have at most a 60% LTV (so you have at least 40% stored in your property).
This can be easier than it sounds, as property prices have increased significantly over the past 10 years. If you took out a mortgage in 2010, for example, property values in the UK have increased by nearly 30% since then, so you would likely have a 25% deposit just from inflation alone. In addition – assuming you don’t have an interest-only mortgage – you would have the money you’d saved as well. This could take your LTV down to 50%, which would put you in one of the lowest-risk tiers.
Of course, that doesn’t take into account other factors such as credit rating and assumes that the state of your home is the same. Adding an extension or a loft conversion could also increase the home’s overall value, so that would also be taken into account.
Should I remortgage my home?
If you’re looking for a lower interest rate on an existing mortgage, remortgaging can be very useful. You need to be aware that providers charge an arrangement fee, and they may charge additional fees for valuations and so on. If you’re going through a broker, you may find that they also charge a fee, although some take commission directly from the provider rather than charging you.
When else might you remortgage?
In some cases, people wish to remortgage when they wish to free up money from the home.
Essentially, you’re treating the remortgage as a way to free up money you have locked up in your home. There are distinct advantages to doing so:
- Mortgages are typically cheaper because they’re secured on the home
- You can borrow larger sums of money
- Your credit score isn’t so vital, although it does play a part
Some also use it to fund their retirement, although there’s a risk you can lose your home if you become suddenly unable to pay the repayments. If you’re looking to fund your retirement, it might be better to consider a lifetime mortgage, although this is usually much more expensive due to the way the mortgage interest rolls up.
For funding extensions, however, a remortgage might be perfect, depending on your personal financial situation. However, it’s always worth getting independent financial advice if you wish to do so. In addition, you should talk with a solicitor to ensure that it doesn’t affect any other aspects of your life, including taxes, divorces and child support, if relevant.
What do I need to consider when remortgaging?
While it’s hard to take into account all possible future expenditures and financial situations, you can usually get a good idea as to what your future is likely to hold. Major financial changes include:
- Having a child
- Cutting hours or leaving a job
- Starting a new business
- Going back to university or college
- Taking retirement
These are just a few possible changes to your financial situation that you need to consider, as they can affect your ability to make repayments in the future.
You also need to consider your current income. If it partially or wholly relies on investments, for example, or you are self-employed, you may wish to have a bigger safety net. Substantial variations in income are possible, and it’s a good idea to average out the past five years of income to ensure you will earn enough should interest rates or income levels change drastically.
So how do you remortgage?
Usually, remortgaging is as simple as going to a provider and answering a range of questions about your financial situation and your plans for the future. You’ll have to provide:
- Proof of identity
- Proof of finances (usually pay slips or tax returns)
- Evidence of ownership of the property
Your mortgage provider might already have some of that information if you took out your original mortgage with that provider.
You’ll have to consider the cost of the arrangement fee and the cost of the exit fee from your last mortgage (if applicable) to ensure you’re making long-term savings.
If you choose to remortgage your home, make sure you get plenty of advice and compare a range of options. Remortgaging rates can vary from trackers offering 0.99% above base rate to 4% fixed fee mortgages, so there are plenty of options out there.
Who can you speak to about this?
As with all financial products you have a choice of searching the market yourself or speaking to a qualified adviser to help you wade through all the possibilities.
Often going to the high street yourself takes a lot of time and if for any reason you do not qualify or don’t get accepted for the loan or mortgage you are looking for then you have to start all over again from scratch.
The alternative is to speak to a qualified adviser who will take all your details in one go and then look for the best possible deal for you. If for some reason you do not get accepted for the loan or mortgage you are looking for then it is up to them to try to find an alternative.
We have partnered with Shop Around Finance to offer this help.