How does a remortgage work? (Back to Basics)

How does a Remortgage work? 

Craig Skelton explains how remortgaging works. 

Nearly half a million homeowners are coming to the end of their fixed rate deal in 2022. When your deal is coming to an end, it’s important to look at remortgaging, because what’s going to happen if you don’t do anything is that you will move on to the lender’s Standard Variable Rate (SVR), which is generally not the best rate on the market. Comparing your lender’s SVR to the rest of the market will give you the information to secure yourself a new deal.  

What is a remortgage?

Remortgaging is the process of moving your home’s existing mortgage onto a new one. This can help you save money and reduce the term of your mortgage. People remortgage for many different reasons, here are some of the main ones:

Deal is coming to an end

If the current fixed rate you have, whether it’s a two year or a five year deal, is coming to an end, you should be looking to lock in a lower rate with a new lender. The lender’s SVR is generally not the cheapest product on the market. 

Your Loan to Value might be better

The lower the LTV (Loan to Value), the less risk it is for the mortgage lender, and therefore, the better the rate of interest they will offer you. For example, if your home is worth £100,000 and your mortgage is £95,000, your loan to value is 95% that’s a high risk to the bank because they’ve only got 5% equity. The interest rate they offer you will be considerably higher than if you had a lower Loan to Value, of around 65%. 

Interest rates are going up and cost of living is going up at the moment, so it’s important to look at getting a remortgage in a timely manner because your home might have increased in value over the last two or five years.

Then what we need to look at is whether you can move brackets from 95% to 90% Loan to Value, because the lower the LTV percentage, the better the rate is. 

To get ahead of interest rate rises

Get yourself a new deal secured before your current one ends, don’t wait until your deal ends. If the deal ends in December 2022, don’t wait until December to start looking at your new deal. If you don’t switch, your payments are going to go up. 

As well as your monthly payments, you can also reduce the term of your mortgage on a new rate that’s the same or lower than you currently had, you could keep the mortgage payments the same or slightly increase your payments and that will reduce your term as well. 

With your broker, work out what you want to pay per month and then you could reduce the term slightly. Even a year or two off will make a big difference in the overall interest that you pay. 

Exit fees

Your existing lender may charge a leaving fee or an exit charge or anything like that. Your broker will look at that for you, and again, it’s just important to have a look at those costs and fees and weigh up the interest rate compared to the fee to ensure that you’ll be saving. 

Can everyone remortgage?

There are various reasons why some people may not be able to remortgage, but looking to remortgage as soon as you possibly can, will tell you whether it’s right for you or not based on your circumstances.

The same as any financial commitments, make sure that your payments are on time for your credit cards and there are no blemishes on your credit record,  because remortgages do require a credit search. 

What is the difference between staying with your existing lender and remortgaging?

If there are no better products on the market, switching your product with your existing lender, known as a product transfer, may be possible. A broker can help you with that and your current lender will just switch you onto a new fixed-rate deal. 

A lot of lenders will offer you free legal services when you remortgage with them, which means that legal conveyancing will be free. Some lenders also offer you a cashback incentive, such as several hundred pounds cash back, but then you’ve got to pay for conveyancing, so it’s about weighing up which deal is suited to you. 

How can a Mortgage Broker help?

Your broker will explain exactly what remortgaging is, then look at what your existing lender will offer, alongside the rest of the market and help you to make an informed decision based on what works for you. 

Start the process and interact with a broker six months prior to the end of your deal, so that they can start to look at what products are available and ensure you’ve got a new one in place directly after your existing deal ends. It doesn’t take long, generally to remortgage, with four to eight weeks being average.