Up to 800,000 UK homeowners could be paying more than necessary for their mortgage, said an article in Homes & Property recently. They could be saving up to seven weeks’ worth of earnings simply by remortgaging, claimed the magazine.
A similar point had been made by Forbes magazine on the 22nd of April 2020, when it referred to the Bank of England’s reduction of the base lending rate to 0.1% on the 19th of March and the subsequent fall in mortgage rates generally.
Reasons to remortgage
Forbes argued that the fall in interest rates allowed many mortgage holders to remortgage their home to enjoy a more favourable, competitive deal.
Many homeowners enjoyed cut-price mortgage repayments while on an initial fixed-rate deal but have since reverted to the lender’s much higher standard variable rate (SVR) once the initial introductory offer expired. Remortgaging – effectively replacing the existing mortgage with a new alternative – offers a way of avoiding the SVR by arranging a more competitive new deal. Money is saved.
Remortgaging may also offer greater flexibility than your current mortgage or lender offers. If you have recently enjoyed promotion at work and earn a higher income, for example, you might want to pay off your mortgage faster – but your current deal doesn’t allow that. Alternatively, a spell of sickness or unemployment might make a temporary pause in mortgage repayments a welcome break – but, again, that’s not possible with your present deal.
Remortgaging offers not only the chance of saving money on your mortgage repayments, but it may also be used to borrow more.
Remortgage to borrow more
While paying off your current mortgage, you have been increasing the equity you own in your home. If the outstanding mortgage is substantially lower than the current market value of your home, the value of that equity is potentially large.
A remortgage allows you to borrow more against the value of your home, unlocking some of that equity and providing you with the cash to meet other budgetary objectives, such as:
- the chance to consolidate loans and other debts by paying them off after borrowing more through your remortgage;
- unlocking some of the capital value that has already accumulated in your home to make improvements or build an extension;
- investing in other property – at a time when the property market seems to be offering a broad selection of attractive deals; or
- treating yourself to a new car or take time off to travel the world.
A remortgage allows you to replace your existing mortgage with a new mortgage – borrowing more into the bargain.
The cost of a remortgage
It is important to bear in mind that there is likely to be some cost involved in arranging your remortgage – and that cost might outweigh the value of remortgaging.
You may be charged a penalty, for example, for repaying your current mortgage early. There may be an exit fee. And, there are likely to be charges for setting up your replacement remortgage.
A remortgage is a new mortgage
Remember too, that a remortgage is a new mortgage, which you have simply used to pay off your existing mortgage. Because it is a new mortgage, any lender must assess its affordability and your ability to maintain repayments on the loan.
Since a remortgage is a new application, any lender will want an up to date valuation of the property used to secure the advance. You will need to pay for that valuation.
The valuation is critical since it helps to establish your current loan to value (LTV) ratio – the amount of your outstanding mortgage as a percentage of the value of your home and, therefore, the amount of equity you own. The more you have paid off on your current mortgage, the lower the current LTV, and the lower the rate of interest you are likely to pay on your remortgage.
Your current financial circumstances will also be assessed along with the financial discipline you will need to repay the loan. So, that means a check with the credit reference agencies to access your current credit rating. Do not be overly worried if your credit history is less than perfect – there are lenders prepared to offer remortgage deals even if you have a poor credit history. Your mortgage broker can help you connect with them.
There are no hard and fast rules on how much you might borrow when remortgaging your property – lenders will make their assessments on a case by case basis after examining your income, expenditure, outgoings and any other borrowing or credit you may have.