Remortgaging means replacing an existing loan with a new one from a different lender - although it is not uncommon to hear people say they have remortgaged when they have simply taken a new deal from their existing lender.
This is often a good option, as it cuts out the need for a new valuation and searches, and as a result reduces the cost of getting a new mortgage.
Why remortgages?
As a potential remortgagee, you need to establish whether you have anything to gain by moving your mortgage.
There are a number of things that can be achieved by a remortgage - you could cut your rate, release equity that has built up in your property, or move from a variable-rate deal to a fixed rate making it easier to manage your budget.
The most popular reason for remortgaging is to reduce monthly repayments. If this is your motivation you should look at the rate you currently pay and then see if there are any better rates on the market.
If there is a better deal, ask your lender if it can offer you anything similar. It should be willing to move you on to a lower rate, unless your current mortgage is subject to early redemption charges.
Early redemption charges
Early redemption charges are levied if you repay your loan in a certain period.
They are often found on deals with a special offer rate upfront - for example a fixed or discounted rate - and are designed to help the lender recoup the costs of setting up the deal. (Or, to be more cynical, these charges allow the lender to recoup in one hit all the profit they expected from the full duration of the loan.)
Usually, the charge is a percentage of the loan you are repaying, or a number of months' interest. Most charges are payable only during the special offer period, but in some cases they are levied beyond that - these are called overhanging redemption charges.
What you will save?
Once you have an idea of the cost of getting out of your current deal, you can work out what savings there are to be made.
Using an online mortgage wizard or mortgage calculator, work out what the monthly repayments will be on a new deal, and compare these with your current payments.
Factor in the costs that may come with a new deal - any arrangement fee, valuation fee and conveyancing costs - and you can see whether there are genuine savings to be made.
In some cases there will be very little in the way of upfront costs. Many lenders offer remortgage packages, including a free valuation and free legal work and waive the arrangement fee on new loans.
This can be handy if you have a small mortgage; but on a larger loan it may be better to look for the lowest rate rather than the best incentives.
Remortgaging to release equity
All of the above also applies if you're remortgaging to release equity from your property.
This is an option of your property has increased in value, or you've paid off a lot of your mortgage, and is simply a matter of borrowing more than your current mortgage debt.
To do this, you need to earn enough to raise the new loan (see guide to borrowing). Remember, if you're arranging a loan over a shorter period than your original mortgage you'll need to earn more to raise the same mortgage.
Costs and time
The total legal costs should be much lower than when you bought the property, as there are no contracts to prepare and there is no stamp duty to pay.
However, you should still budget to spend £300-£500, unless your new deal comes with free legals.
It shouldn't take long to replace your current deal with a new mortgage, but if you're coming to the end of a fixed-rate or discount period you, can start shopping around some months in advance.
Most mortgage offers last for around three months, and if you plan ahead you can have a new deal sorted out to start the day the special-offer rate ends. This means you can hop from one fixed rate to another and avoid paying over the odds for your loan.
Types of Mortgages
Variable rate mortgages
The most bog-standard (vanilla) kind of mortgage is a deal on a lender's standard variable rate (SVR). This is the lender's own mortgage rate and one that's subject to change whenever the lender chooses.
Although most lenders won't change the rate unless the Bank of England base rate changes, they're within their rights to change it whenever the fancy takes them - and by as much, or as little, as they feel like.
Borrowers who are paying the lender's SVR will see their monthly payments increase or decrease whenever the Bank of England makes a change.
But although increases in the Bank of England's rate are usually passed on in full, when the Bank cuts its rate, lenders rarely pass on these reductions in full.
If this leaves an unpleasant taste in your mouth, check out Tracker Mortgages.
Discount mortgages
For a set period, usually one to five years, the lender offers a reduction on its SVR. For example, it might offer a discount of 1.5 per cent over three years. However much the SVR rises or falls during the discount period, you always pay a rate 1.5 per cent lower.
Some lenders offer stepped discounts, where the level of the discount decreases after a set period. For example, you may get a 2 per cent discount for a year, followed by a 1 per cent discount in year two. After the discount period the interest rate will usually revert to the lender's SVR.
Fixed-rate mortgages
This kind of mortgage offers a fixed interest rate for a set period. Whatever happens to the lender's SVR during that period, your monthly mortgage repayments will remain the same, which makes this type of mortgage ideal for people on a tight budget.
In general, the longer the fixed-rate lasts, the higher the rate, but lenders do occasionally offer low long-term fixed rates. If you see a deal you like, it's wise to act fast, as fixed-rate mortgages tend to be available for a limited period.
Capped-rate & drop-lock mortgages
These two options seem to offer a happy medium between fixed-rate and capped rate deals.
The capped-rate mortgage offers a limit to how high the interest rate can rise, but the rate you pay can move up and down below that level. You benefit from any rate cuts but during the capped-rate period your repayments cannot rise above a certain level. Drop-lock mortgages combine discount and fixed rates - you start off on a discount rate for a set period but if you become concerned rates will rise, you can move onto a fixed rate. This will last for the rest of the period. This kind of deal gives you flexibility, but you may not get the best fixed rate on the market.
Tracker mortgages
In recent years lenders have launched mortgages with rates attached to the Bank of England base rate. These deals tend to have rates at a stated margin above the base rate, although there are some deals with rates below base rate.
The base rate is set each month by the Bank of England's Monetary Policy Committee and if it's increased or reduced the interest rate on a tracker mortgage rises or falls by the same amount. However, some lenders have lower and upper limits on the pay rate - ask about these before you sign up.
Most lenders offer trackers for a short period before rates revert to the SVR. However, there are deals available that track the base rate for the whole mortgage term.
Mortgages: which deal is best for you?
When deciding between all these deals you need to think about two things - what you think will happen with rates, and the flexibility of your budget.
If you earn the same amount each month and are struggling to afford the mortgage repayments, it may be a good idea to take a fixed-rate deal. The cost will be the same each month, so if you can afford it now, you should be able to afford it throughout the fixed-rate period. Borrowers with more flexibility might prefer a discount deal. These usually have a lower rate than fixed-rate deals and offer the chance to benefit from any rate reductions. The downside is that, as with any variable rate deal, your payments could change from month to month. Also, unless there's a cap on the rate, your payments could rise. And rise. And rise. The best deals are available to borrowers who are willing to commit to a lender for a set period - whether on a fixed rate, discount or tracker deal. However, borrowers who are uncertain about rates could consider a deal with no early redemption charges.
You may pay a higher rate for the privilege, but at least it's free to change your mind and move to a different type of deal.
Re-mortgages
Re-mortgages are an ideal way of paying off your mortgage and releasing the money tied up in the value of your property. A re-mortgage pays off your existing mortgage and gives you the extra money you are looking for, often at a lower rate than you are paying currently. You can take a re-mortgage over a short or long term, to suit your budget. After paying off your existing mortgage with the re-mortgage you can use the extra money for almost any purpose. Tell me more...
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Bridging Finance
If you are looking for finance for up to 12 months Bridging Finance is often the ideal option if you are purchasing a property and need to complete quickly otherwise you will lose your deposit. You can use Bridging Finance for almost any purpose providing you have the finance to pay off the balance within the next 12 months.
As an example you could use a bridging loan for a re-mortgage, endowment, inheritance, property development, a quick property purchase, business investment or expansion.
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