Mortgages Guide | Mortgage Help Product Information

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Introduction

A remortgage is essentially no different to a mortgage, with one crucial difference - you are not buying a house. All you are essentially doing is taking out a new mortgage to repay the old one, while shifting your debt from one lender to another.

Before you go ahead and jump ship from your current lender, consider the fact that remortgaging to a new lender is not best for everyone. Most lenders will automatically transfer you to the Standard Variable Rate at the end of your fixed or discounted deal. However, it may be possible to switch to another scheme with the same lender, thereby negating the need for additional conveyancing and a valuation. Some lenders even permit you to do this on a fairly regular basis.

Why Remortgage?

The number of borrowers switching deals has trebled in last few years. This has happened principally because of four factors or reasons:

  • Ease of switching
    The streamlining of legacy processes and the increasing role that technology has to play in the conduct of financial services business means that it is now easier to switch mortgages than at any point in the past.
  • Save money
    A gradually increasing financial sophistication amongst the UK public has meant that people are slowly waking up to the savings remortgaging a property can achieve in terms of monthly outgoings. The temptation of saving hundreds or even thousands of pounds each year is enough for many people to abandon their high-interest Standard Variable Rate and switch to a more competitive deal.
  • Raise capital
    Soaring house prices have left many homeowners sitting on a large amount of equity. Releasing some of this equity can be one of the cheapest methods of gaining large amounts of secured loan finance. Assuming you stay within the permissible Loan-To-Value range, then if you remortgage your property for a sum that is greater than the amount needed to repay the original mortgage, then the borrower gets to keep the difference. For many people, this can be the best way of paying for DIY projects, a new car, school fees or some other major expense.
  • Changing product type
    A reasonable number of people remortgage in order to change product type. It may be that they wish to move to a current account mortgage, or perhaps get rid of a poorly performing endowment. Remortgaging gives you all the same choices as if you were taking out a mortgage for the first time.

How Much Can I Save?

It must be remembered that there are costs attached to remortgaging, outlined on the next page. However, purely in terms of ongoing monthly expenses, remortgaging has the potential to slash a lot of money from your outgoings.

Here are a couple of examples:

1. If you are paying a Standard Variable Rate of 7.5 percent on a 25-year mortgage of £100,000, your monthly outgoings will be somewhere around the £735 mark, depending on the discounts that you initially enjoyed.

Switching to a new 25-year tracker mortgage that is currently charging 5%, your outgoings would immediately fall to a little over £580. This means you would be cutting your monthly expenditure by over £150, potentially cutting your outgoings by £1800 each year.

2. In a more extreme example, the borrower is currently paying 7.7 percent on a 25-year mortgage of £150,000. If for some reason this rate had been paid since the start of the mortgage, the current monthly outgoings would be around £1125.

If the borrower were able to remortgage on a heavily discounted two-year fixed rate mortgage charging just 2 percent, then the current level of repayments would fall to just £635. Even if the mortgage then reverted to 7.7 percent, this would still offer potential savings of £490 a month or £11,760 over the two-year fixed rate period. If this money was invested elsewhere or used to reduce the mortgage debt, it could be worth considerably more to the individual.

For many people, the biggest potential cost of remortgage comes from redemption fees associated with ending their existing mortgage contract. These will be largest when an early redemption penalty is incurred, but there may be some sort of fairly low redemption fee even if the mortgage is redeemed outside the early redemption penalty period.

How Much Does It Cost?

Early redemption penalties are likely to be biggest when you are still within an introductory offer period and the rate of interest that you are paying is fixed, discounted or capped. However, some lenders employ an overhand, where the early redemption penalties extend beyond this period. Depending on the policy of the lender and the size of the loan, redemption penalties can cost several thousand of pounds, which would obviously need to be factored into your calculations of whether it is worthwhile remortgages. Quite often it is not worthwhile, but you should not rule out remortgaging within the penalty period if you are stuck on a particularly high rate or have access to a particularly good deal.

In addition to any redemption fees, there are a number of other costs attached to remortgaging your property:

Firstly, the new lender will wish to value the property to ensure it is worth sufficient money to loan you a new mortgage. They will not rely on the valuation of the previous lender and the cost of this is normally the same as for a normal mortgage. However, the good news is that you will not require another survey for your own peace of mind, as you are likely to with a house purchase.

Secondly, there is some conveyancing work to be done as part of the remortgage process. Again, the cost of this is not usually as much as with a house purchase, but your solicitor will have to perform new local searches, as the old ones are only valid for 3 months from the date on which they were carried out.

Many lenders will offer some form of remortgage package, which entitle you to a refund of your valuation and legal fees on completion of the remortgage, provided you use their panel of professionals. If you are considering such a deal, make sure that the package is genuinely free of charge and not offered at the expense of a lower rate of interest. Because the cost of conveyancing and valuations are not linearly related to the value of the property, this type of remortgage package tends to be more worthwhile with a lower value property, as the costs represent a bigger proportion of the property value.

Don't forget that when you remortgage, you will be moving back to the start of a repayment curve. This means that interest will once again form big part of your monthly repayments and a smaller proportion of your payment is working towards reducing the outstanding capital. Furthermore, most people who remortgage generally extend the term beyond the end of their old mortgage. This means that you will be paying interest for longer and may face a higher long-term interest bill, even if you appear to be making short-term savings.

How Long Will It Take?

When you remortgage, the process is similar to that when you buy a home, but is much quicker. The exact length of time it will take depends on the lender, but somewhere around four to six weeks is normal.

However, if you are in a real hurry, it is possible to find fast track remortgage services, particularly with mainstream lenders geared up to do business online. Some rapid remortgage services promise to get your deal done inside a week, as long as there are no problems with your application.

This is itself is rather less likely than with a home purchase mortgage, because the application forms for a remortgage are often a lot more straightforward. To help speed your application it is also worth having all your paperwork in order before you apply, so get together your bank statements, salary details, existing mortgage statements, proof of identity documents and anything else you are likely to need.

One way in which some lenders seek to speed up the process of remortgaging is through the use of title insurance. This type of product gives both you and the lender a guarantee against defects in the title of a property, such as missing or incorrect legal documents, fraud, a defective lease, inaccurate boundary descriptions and so on. This avoids the necessity of having a solicitor carry out the conveyancing work when you are remortgaging. If something does ultimately come to light, the insurance provider defends your rights in court if necessary and will be responsible for any compensation payouts.

Choosing a Remortgage

Choosing a remortgage is essentially no different to a mortgage. Below is a very brief summary of the key areas to consider:

Type of interest rate
There are a wide range of different types of interest rate to choose from, each of which is geared to different individual circumstances and attitudes to what will happen in future. Briefly, the main ones available are:

  • Variable/tracker - The interest rate payable on variable and tracker mortgages will rise and fall in line with some other measure, usually the Bank of England base rate. The lending rate is likely to be at a set level above the prevailing base rate.
  • Fixed - Fixed rate mortgages guarantee a specific rate of interest for a set length of time. Most commonly, this is for between one and five years, though it can be as long as ten, fifteen or even 20 years. Once the fixed period is over, borrowers then revert to paying the prevailing Standard Variable Rate.
  • Discounted - With a discounted rate mortgage, the Standard Variable Rate of a lender is temporarily reduced by a set amount for a specified period, usually from one to five years. Once the discounted period is over, borrowers then revert to paying the prevailing Standard Variable Rate.
  • Capped - The interest rate on a capped mortgage follows the lender's SVR up and down, with the key difference that the rate is guaranteed not to go above the level at which it is 'capped'. This cap will not last the entire life of the mortgage, but it is common to find rates that are capped for five years or more.

Repayment method
You will have to choose between a repayment mortgage and an interest-only mortgage:

  • Repayment mortgage - This simple, low risk method involves making a single payment to the lender each month, part of which will pay interest on the debt, with the remainder reducing the amount owed.
  • Interest-only mortgage - Interest is paid on the full amount of the loan for the whole term of the mortgage. While the repayments to the lender are lower, the borrower will need to invest in some other product in order to ensure that enough money is generated to pay off the loan at the end of the term. The three most common forms of investment used to accompany an interest-only mortgage are endowments, ISAs and pensions.

Type of product
Most people opt to take out a standard loan with a mainstream lender, but there are many people for whom this is not suitable. Instead, they will choose some form of non-conforming mortgage, the types of which can include: fully flexible or current account, 100%, buy to let, let to buy, bad credit, self-employed, self-certification, self-build and foreign currency mortgages. Beyond this, product features such as the frequency of interest calculation, any incentives offered, loan portability, mandatory products and the flexibility of the loan are all important factors that need to be looked at.

Size and term of loan
Deciding how much to borrow and for how long is an important part of remortgaging and your decision will ultimately rest on your motive for remortgaging as well as your capacity to repay the debt. You may wish to extend the term and minimise your repayments, increase your borrowings and release more of the equity tied up in your property, or simply shift to a lower payable rate of interest, keeping the same completion date and outstanding debt. Remember that the best deals are usually available when the amount borrowed is less than 80 percent of the property value.

Fees and charges

Think about the fees and charges that are associated with a particular mortgage. If you are likely to become a relatively frequent remortgage customer, avoid moving to mortgage that has extended redemption penalties. Some lenders have introduced stiff penalties to cut out what is referred to in the industry as 'rate tarting'. Also look out for application fees, mortgage indemnity or high percentage lending fees and the general schedule of charges that the lender employs.