Remortgages Explained: Read our Complete Guide
- 1 Remortgages Explained: Read our Complete Guide
- 2 Finding a better mortgage plan to reduce monthly payments
- 3 Reducing the term of your mortgage
- 4 Reducing your monthly payments
- 5 Releasing some equity from the value of your property
- 6 Who is remortgaging not suitable for?
- 7 Establishing your Loan-to-Value ratio
- 8 What remortgaging plan should I go for?
- 9 Final thoughts – renegotiating with your current lender
Whether you are looking to reduce your monthly mortgage repayments, cut its overall term or simply repay some debts – remortgaging can be an excellent way to free up some much needed capital. In a nut shell, remortgaging entails moving your mortgage from one lender to another, with the view of giving yourself a better deal.
However, at first glance the process can seem somewhat daunting. In our Ultimate Remortgaging Guide we are going to discuss all of the fundamental requirements that you first need to consider. This will include some of the main reasons why people decide to remortgage, who it’s suitable for and what you need to do before getting started.
By the end of reading our guide you will have all the information you need to make an informed decision! Let’s start by looking at some of the factors that motivate people to remortgage.
Why is remortgaging a good idea?
It is highly likely that your monthly mortgage repayments are one of your largest financial commitments. As a result, although there could be a variety of reasons why you are considering the process of remortgaging – the ultimate objective is to save money. Let’s break down these factors in more detail.
Finding a better mortgage plan to reduce monthly payments
One of the most common reasons that lead people to remortgage their property is to reduce their monthly payments by obtaining a cheaper mortgage.
Quite often, first time buyers secure an initial introductory fixed rate plan. When this expires, the variable rate that they are moved on to is substantially less favorable, so it makes sense to shop around for a better deal.
Interestingly, if you are currently on a variable rate that is tracked to the interest rates set by the Bank of England, then you are probably in receipt of a good plan, so it might not be the right time to switch if this is your primary motivation.
Reducing the term of your mortgage
You might be considering the process of remortgaging your house because you want to reduce the term of your plan. If you actually have a surplus of monthly capital and want to pay off more than your monthly repayments demand, unfortunately some lenders do not permit it. This can be highly frustrating if you are looking to pay off your mortgage much sooner.
By remortgaging your property with another lender, you can give yourself the opportunity to reduce the overall term of the mortgage by increasing the monthly payments. On the contrary, if you are able to find a new lender that offers significantly better rates, you might be able to keep your monthly payments the same and still reduce your overall term.
Reducing your monthly payments
Some people are still struggling to prosper in the current economic climate, meaning that at times – there just isn’t enough disposable income available at the end of the month. If you feel that your monthly repayments are becoming more and more difficult to meet, it might be worth considering remortgaging your property with another lender.
This will allow you to extend the overall term of your mortgage and subsequently, reduce your monthly payments. However, not only will it take longer to pay off your mortgage in its entirety, but you will end up paying more when you take in to account compounding interest.
Nevertheless, if this results in you obtaining a more affordable package, it might be the right decision for you.
Releasing some equity from the value of your property
A further factor that sometimes motivates people to remortgage is to release some equity from the value of their property. Essentially, the way this works is you borrow funds from a lender and subsequently, your new mortgage is larger than your existing one. However, this can be a smart move if the value of your property is significantly more than the value of your current mortgage.
For example, if the overall amount of your mortgage is £200,000, but the property is now worth £280,000 – then you have £80,000 in equity. Just remember, if the property markets goes through a period of decline, you could face the risk of negative equity. This is where the value of a mortgage is higher than the actual value of the asset.
So now that you know some of the reasons that people decide to remortgage, the next part of our Ultimate Remortgage Guide is going to look at who it might not be suitable for.
Who is remortgaging not suitable for?
Although the process of remortgaging has the potential to save you money, there might be certain circumstances where it is not suitable. First and foremost, you might already be accustomed to a really good deal. If you do decide to remortgage and the potential savings are minimal, don’t forget that you might have to go through the whole process again if that particular deal is no longer favorable.
You also need to consider the underlying conditions that your current plan dictates. For example, you might be locked in to a mortgage plan that has installed an early repayment charge. If the charge is enormously high, it might make financial sense to wait until the penalty period expires.
A further thing to consider is the Bank of England interest rates, as your current plan might correlate to any adjustments. Interest rates have been ultra-low since the turn of the financial crisis in 2008, meaning that those tied in to a tracker mortgage are still benefiting from lower monthly repayments. If this sounds like you, it might not be the best time to switch.
You also need to consider how much of your property you actually own. If you still have more than 90% of the mortgage left to repay, then you might not be able to secure a new plan with a different lender. Even if you can, the rates on offer might not be competitive enough to make it worth your while.
Establishing your Loan-to-Value ratio
Before taking the remortgaging plunge, you will first need to calculate what your Loan-to-Value (LTV) ratio is. In effect, the LTV ratio resembles the amount of money that you want to borrow against the amount of equity you currently have.
In the case of remortgaging, equity resembles the amount of money that you have already paid towards your current mortgage, against the current value of property. For example, if your house is worth £200,000 and you have already paid off £40,000 (your equity), then your LTV ratio 80%.
The higher the LTV ratio, the more capital you are essentially borrowing from the lender – so more favorable rates are reserved for those will a lower LTV. Moreover, some lenders will install a maximum LTV cap, meaning that you might not be suitable.
You also have to take in to consideration the value of the house when you first purchased it. It is highly likely that your property is now worth more than it was when you bought it, meaning that your LTV will subsequently have been reduced. Take a look at the following example.
- When you first bought your home, it was worth £150,000 – of which you provided a deposit of £15,000.
- As a result, you originally owed the lender £135,000, giving you an LTV of 90%
- If after a few years you’ve paid off £15,000 and the house is worth the same, then your new LTV is 80%.
- However, if the value of the house is now priced at £180,000 – your LTV would actually be around 66%. Remember, the less LTV you have – the better!
If you need to reduce your LTV ratio to get the remortgage plan you are after, there are a couple of things you can consider. Firstly, if you borrow a lower amount, your LTV will of course go down. Don’t fall into the trap of borrowing more than you need – otherwise, your LTV ratio might prevent your chances of approval.
Secondly, you should ensure that your property is valued at its highest potential. Just make sure that the value is realistic, as the lender will no doubt arrange for an independent valuation of their own.
What remortgaging plan should I go for?
When you remortgage your house, you are essentially obtaining a completely new deal with a new lender. In this sense, you are repeating the process that you originally completed when you first bought your home. Things might have changed quite considerably since then, so it well worth reading through this section to ensure you know what type of plan you intend on switching to.
Repayment or interest only?
Before choosing a specific plan, you need to consider whether you want to go for a repayment mortgage or interest-only. Regarding the latter, this is where you only pay off the accumulated interest every month.
For example, if the overall value of the mortgage is £200,000 and you have an annual interest rate of 5%, your yearly repayments will amount to £10,000. However, what this means is that you would not have actually repaid any of the amount loaned, as you are only repaying the interest.
On the other hand, a repayment mortgage means that you pay off the entire value of the mortgage over an agreed term. For example, if the new mortgage plan amounts to £150,000 over the course of 25 years, your monthly repayments will include both the amount loaned and the interest.
Interestingly, during the initial years of your mortgage when the amount owed is at its highest, the vast majority of repayments only cover the interest. However, as time goes by and your repayment start to accumulate, the value of the outstanding mortgage starts to reduce.
Fixed plan or variable?
When deciding what plan to remortgage across to, you will need to consider whether you want a fixed or variable plan. A fixed plan means that your agreed rate will remain constant throughout the course of your mortgage. For example. If you agree a rate of 3% interest with your lender, this amount will not change. What this means is that your monthly payments will always be the same, so you never need to worry about an increase in the future. This also makes it much easier for you to budget in both the short and long-term.
However, fixed rate plans do come with some disadvantages too. There is often a premium to obtain a fixed plan, meaning that your rate might not be as favorable as a variable plan. Moreover, if the Bank of England lower their interest rates, you won’t be able to benefit from lower repayments. Finally, some lenders install a hefty penalty for paying off your mortgage early, meaning that if you want to switch in the near future, it could be costly.
A variable plan is quite different to its fixed plan counterpart, as your monthly payments can change at any time. In some circumstances this might go in your favor, however it could equally have a negative impact too. If the Bank of England do drop their interest rates, although you probably won’t get the exact percentage reduced, your monthly payments will most likely go down. Moreover, there are rarely any penalties installed for leaving the mortgage early.
However, you also need to remember that a variable plan will not offer you any certainties. If your monthly payments suddenly increase, you need to make sure that you have ample savings to cover the extra costs.
Final thoughts – renegotiating with your current lender
Before you begin the process of remortgaging with a new lender, it is well worth contacting your current provider to see if they are able to match, or even better the plan you have your eyes on. Your current lender will not want to lose your custom, as they are essentially losing business to a competitor.
Some lenders have something called a product transfer, which allows you to change the terms of your current deal. This type of offer is reserved for customers who are looking to jump ship, so in most cases they won’t advertise them publically.
If you are able to obtain a competitive product transfer, it means that you will be able to make the switch ultra-quick. Furthermore, the lender won’t need to do as much due diligence as they already have an in-house record of your historical repayments. If you’ve always paid on time, then you have a much better chance of approval.
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