How does remortgaging work?

The following is a brief step-by-step guide to understanding the remortgaging process and the benefits of working with professional mortgage brokers.

If you’re a homeowner and you’re keen to remortgage and benefit from the most competitive deals on the market, this step-by-step guide should provide some insight into the process. The process of remortgaging can be a very effective way of saving money on your mortgage repayments, but it is often difficult to know whether or not you are getting a good deal. For those unfamiliar with the term, remortgaging is essentially moving your current mortgage to a new lender, usually a provider which offers a lower and much more attractive interest rate.

Attractive options for new customers

Most mortgage products on the market nowadays will have limited terms, lasting around two to five years from the beginning of the deal. This is to entice new customers. However, as they have a limited time span, the attractive rate will eventually finish and you will transfer to the lender's standard variable rate (SVR) which is usually a much higher rate of interest which will end up costing you more in monthly repayments. So remortgaging to a brand new deal with a new lender can be an excellent means of securing another good low-cost product/deal.

Do your sums before taking the plunge

If you want to scan the market yourself, you can do some quick calculations to ensure that you are getting a good deal. Do bear in mind, however, that if you switch your mortgage before the end of your current deal, then you might have to pay an early repayment charge which can be substantial - often 2 to 5% of your loan. In addition, there is usually an exit fee which is often referred to as an 'admin fee.’ It’s important to time any change to coincide with the point at which the initial offer concludes. You should begin the search for a new lender at least three months before the end of the initial interest rate period. So the key message here is to do your sums before taking the plunge. If you're in any doubt, seek out the advice of a professional mortgage broker.

Fixed vs variable

There is a wide range of mortgage products on the market, from repayment mortgages to interest-only and fixed-rate mortgages. Then there are the more flexible variable rate mortgages and tracker mortgages, as well as discounted rate and capped rate mortgages, offset and buy to let. This can seem something of a maze to navigate around, but with the right advice, you can be sure you are making the right decision.

Repayment mortgages

Repayment mortgages involve monthly payments comprising an interest element plus some of the capital you've borrowed. At the end of the term, usually 25 to 30 years, you will own your home outright. If you move house before the 25 to 30 year period ends, you might be able to 'port' the mortgage to your new home, or alternatively, you can repay it in full and take out a new one. This is ideal for homeowners who want to ensure their home is paid for at the end of the term.

Interest only mortgages

How does remortgaging work in this case? You pay just the interest month by month and then repay the capital at the end of the period using money you've saved elsewhere. You can save any way you wish, but it’s essential that you have this capital at hand for the lender at the end of the period. If you don't, you may have to sell your home. Before approving an interest-only mortgage, the lender may ask you to demonstrate how you intend to pay off the loan. The main advantage here is that the monthly repayments will be a lot lower. However, if you find this is not the loan for you, you may be eligible to move to a repayment mortgage. As ever, the expert opinion of a broker may prove valuable.

Fixed rate mortgages

Fixed rate mortgages are a popular choice, especially with first-time buyers who want the security of a fixed payment for an agreed period of time. This means the monthly outgoing will be the same for the 2 - 5 years as secured in the initial product, or in some cases, 10 years. The down side is that you will be tied into this higher payment if other rates go down. It may be possible to get out of a fixed rate contract, but there will be an early repayment charge. This option is good for buyers who are keen to budget.

Variable rate mortgages

A standard variable rate is the interest rate that all borrowers will go onto after completing any introductory period with a fixed, tracker or discounted option. Some lenders will also permit you to take out a new mortgage on their standard variable rate. This figure is partly influenced by the Bank of England base rate, but other factors are taken into consideration as well. This may be an attractive option for buyers who think interest rates are likely to go down.

Tracker mortgages

Tracker mortgages fluctuate in line with the Bank of England base rate. The actual rate you will pay will usually be set above the base rate. When the base rate rises, the mortgage rate will also go up. It will also come down when base rate comes down. Often there's no limit as to how high it can go. This may be a good option for buyers who can afford to pay more if the rates do go up.

The good news is that if the value of your home has risen since you signed your mortgage deal, you could find you’re in a lower loan-to-value (LTV) category. This means that you could be eligible for a lower rate. Again, it’s essential to do the calculations or leave it to the professionals. Borrowers tend to end up paying a higher rate initially if they opt to fix their mortgage rate, as opposed to choosing a tracker. This can suit some homeowners as it gives added security and peace of mind, knowing exactly what the monthly payments will be for the next few years.

Those with a little more flexibility and more disposable income might prefer to opt for a variable rate. This may suit those who tend not to have to worry about budgeting. The variable rate option can offer lower monthly payments in the short term which is ideal for many. The main issue with base rate increases or decreases is that no one knows when or if they will be announced, so there is little point in trying to second guess the market.

The most important message here is that there is no right or wrong answer. It’s important to go with the option that best suits your personal circumstances and one with which you’re comfortable. If you are concerned that your mortgage payments may rise and become unaffordable, go for the security of a fix.

Fees

Take into account the arrangement fee

The mortgage with the lowest rate on the market may not actually turn out to be the best deal. That’s because you will have to factor in the often costly arrangement fee as well. You could find that it is cheaper to pay a marginally higher rate of interest if the arrangement or set-up costs are lower. This, of course, depends on the amount of money you require from the lender. If you are asking for a large sum, it may be worthwhile in the long run to pay a higher fee in order to benefit from a lower interest rate. However, if the amount to be borrowed is smaller, then it may be preferable and more financially viable to select a slightly higher rate to take advantage of a lower arrangement fee.

The key is to work out how much you will end up paying in total over the course of the mortgage, which includes both monthly payments and fees. For example, lender one has a two-year tracker at 2.49% with a £999 fee, while lender two is offering a two year deal at 2.64% with a £500 arrangement fee. Despite the higher rate, deal number two is actually cheaper over the two-year term on loans below £280,000 because of the lower fee.

Exit fees will be charged

So, how does remortgaging work in this regard? When you remortgage, you will normally be charged a fee by your current provider which is to cover the administration costs of closing the existing mortgage account. Costs can vary but should be no more than around £300. The fee will be outlined in the original mortgage paperwork and the good news is that a clampdown by the Financial Conduct Authority means that lenders are tightly controlled as to the fees they are permitted to charge. Don’t forget that there will be other costs such as legal and valuation fees to take into consideration as well. Some mortgage products can include a free valuation and legal work.

Affordability & loan values

This process can seem very complicated and intimidating to even the most financially astute of us, as a result of which many homeowners choose to benefit from the experience of a professional mortgage broker.

In the past, lenders would have multiplied the household income by up to five times to work out a maximum figure for borrowing. Now, the process operates somewhat differently as the lender must adhere to affordability criteria imposed by the regulator and must satisfy itself that you are able to afford the monthly premiums. Each lender has a different formula when calculating how much it will lend. In most cases, the basic salary or salaries will be added up, in addition to other income such as commission, bonuses, and second or additional freelance jobs.

The lender will then examine your outgoings, such as any credit repayments you may have, together with utility bills, food shopping and any other payments to work out your disposable income. Your income must not only cover the new mortgage payment but also allow for a rise in rates, for example, if the figure was to rise from 5% to 6%. If you have found yourself in arrears or have a less than stellar credit history, then the remortgaging process might prove more challenging but there are lenders out there who will consider applicants with a less than perfect financial profile. Our expert mortgage advisers have access to a wide range of lenders and can advise in this regard.

One key point to note is that the amount of equity you have in your home can make a difference to the competitiveness of the mortgage products for which you may be eligible. To obtain the more attractive rates, you really need a deposit of at least 25% - in some cases more.

Our remortgage advice is confidential, reliable, and offered by highly trained, regulated professionals. A remortgage broker can guide you through the process of securing the best remortgage deals, step by step, helping you to avoid the most common pitfalls.

A broker will explain all the costs and features of the relevant products and they will examine your financial situation to make sure you can afford the mortgage. They will only recommend lenders and products which are suitable for you. They will assist you with the completion of the associated paperwork and help to expedite your application. The mortgage market is complex and can be hard to negotiate. There are so many different providers, products and rates out there. Why not contact us today so that a professional can take you through the maze of securing a remortgage that best suits your needs.

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