How to Remortgage

Are you facing a shock to your financial system? Millions of fixed and discounted rate mortgage deals are ending just as the credit crunch is biting. Lenders have tightened up their rules and reduced the number of mortgage deals available. Many borrowers are facing a substantial rise in their mortgage costs. When you remortgage you move your mortgage from your existing home loan to another loan, paying off the old debt with the new one. You may or may not change lender. There are two basic reasons to remortgage: you remortgage to save money with a better rate of interest or you remortgage to borrow more money against the value of your property.

• What is remortgaging?
• Why you may want to remortgage
• Understand your existing mortgage
• What are the costs of remortgaging?
• Is remortgaging right for you?

What is remortgaging?

Put simply, the process of remortgaging in the UK is transferring your outstanding mortgage debt from your existing loan to a new loan without moving home. In fact, you may not even move from one lender to another. You may remortgage either to save money or to release a cash sum if your home is worth more than your existing debt. Your mortgage is likely to be your biggest financial commitment. It is important to review it regularly to ensure it is still appropriate to your circumstances. You may wish to take independent financial advice.

Please remember that as with any mortgage your home may be repossessed if you do not keep up the repayments.

Moneyextra's mortgage calculators can help you work out what you can afford

Top of Page

Why you may want to remortgage

There are two basic reasons behind a decision to remortgage. You may be looking to save money by paying a lower interest rate on your debt or you may want to take advantage of the fact that your property is worth substantially more than your outstanding debt i.e. cash in some of the equity in your home. Thus by remortgaging you could:

• obtain a better mortgage rate, saving on your monthly outgoings or, in the credit crunch climate, reduce the increase in your mortgage payments.
• release equity in your property to pay for home improvements more cheaply than by using a personal loan
• consolidate existing shorter-term debts that carry higher interest rates, thus reducing your current monthly outgoings

In recent years the UK remortgage market has been highly competitive with thousands of remortgages on offer. However, in the wake of the credit crunch, the number of mortgage products on offer has fallen sharply. At the same time, lenders have tightened up their lending rules and are no longer willing to lend as freely as they did. Interest rates on fixed and discounted rate mortgages have also risen in response to higher interest rates in the money markets. In short, as the credit crunch unfolds, it is a lot harder to find a really good mortgage deal. However, it is still worth searching the market to see if you can control your monthly outgoings. The question is whether any saving you make might be offset by the costs of moving your debt.

If you are planning a new kitchen or a new bathroom, for example, it makes sense to consider remortgaging to fund the work if you can access the extra funds needed through a remortgage. After all, you are investing in the value of your home so it makes sense to set the cost of improvement, the liability, against the asset, a more valuable home. Of course, you may just want the money for a big holiday or a new car.

If you have shorter-term debts, such as credit card debt, personal loans, overdrafts, you may find that the interest rate being charged is substantially higher than the rate charged by your mortgage lender. You could reduce your current monthly outgoings by rescheduling all your short-term debt onto your mortgage. However, while you may end up paying much less on a monthly basis you should be aware that over the term of your mortgage this could cost you more as you will be paying the interest for a much longer period. You also need to be aware that you are replacing unsecured debts with a secured loan, and therefore you are potentially putting your home at risk of being repossessed if you are unable to maintain the mortgage repayments.

Are you looking to remortgage? Maybe to extend your mortgage or just to get a more competitive interest rate?

Top of Page

Understand your existing mortgage

If you are thinking about remortgaging the first thing you need to do is make sure you understand your existing mortgage payment terms. Any early repayment charges that you may face (fees you pay for repaying the mortgage early) might make it not worth remortgaging right now.

Any borrowers currently on fixed, capped or discounted mortgages are likely to encounter early repayment charges for moving a mortgage. Nearly all mortgages that offer such 'special' rates will also charge penalty interest for moving your debt during the special rate period.

Some mortgage deals also come with 'overhangs'. In these deals the borrower's mortgage is tied to the lender's standard variable rate for a set period of time after their fixed, capped or discount incentive rate expires. Thus, any move to remortgage during this overhanging period would also attract early repayment charges.

So, you need to know what kind of mortgage you already have. You must be able to answer these questions:

• Are you in a special rate deal - if so for how long?
• If you are no longer paying a special rate, are you in an overhang period?
• What penalty payment, if any, will be required to move your mortgage?

Find the best buy fixed rate mortgages

Top of Page

What are the costs of remortgaging?

Aside from any penalties that you may or may not incur, you will almost certainly still be required to pay a small redemption fee to pay off your existing mortgage before the end of its set term.

The big saving in fees and costs that you make when comparing remortgaging against moving is that there is no stamp duty to pay since you are not actually purchasing a new property. However, other than that, you will face charges that are broadly those you would have faced when you first arranged a mortgage. The likely fees and charges that you need to take account of are:

• Your lender's booking/arrangement fee
• A valuation fee
• Solicitors' conveyancing fees
• A Higher Lending Charge may be payable

Taking out a new mortgage will involve a 'booking' fee usually of around £450-750 depending on the lender and the size of the mortgage and type of product. It is unlikely that your lender (even your existing lender) would be willing to accept the original valuation report from when you purchased the property in the current climate of falling house prices - even if it was a recent purchase - especially if you are extending your mortgage. However, if you previously had a full structural or homebuyer survey carried out, the lender may not require such a detailed report again.

You may need to appoint a solicitor to conduct the legal work. You may be able to avoid doing so if you are staying with the same lender or where your new lender is prepared to pick up the tab for the legal bill. If not, bear in mind that the solicitors' fees are likely to be lower than those charged for moving house as the work involved is much simpler.

If you are borrowing a high loan-to-value ratio, that is to say if the amount you want to borrow is more than a certain percentage of the value of your property, you may be required to pay a Higher Lending Charge (HLC).

Check our mortgage best buys now

Top of Page

Is remortgaging right for you?

There are times when it will be obvious that you can save money by remortgaging, but in the wake of the credit crunch this may not be the case and indeed it may even be impossible to persuade a lender to give you greater funds. Interest rates on fixed and discounted rate mortgage products have been creeping up, leaving many not far off a typical standard variable rate.

However, those looking to borrow substantial sums, running perhaps to tens of thousands of pounds, for whatever reason may still find that the cheapest way of doing so on a monthly basis is to extend their mortgage. A lender may still be more than happy to do this if you have sufficient equity in your home. Do be aware, however, that you will be paying interest against such borrowing for a much longer period than a standard personal loan and it could end up costing you more overall because of that.

If you are looking to reduce your monthly outgoings you should be aware that any saving you make on the interest rate you pay by switching your mortgage will be at least partly eaten up by the transaction charges associated with moving your loan.

There may be early repayment charges and reservation fees demanded by your old and new lenders. You may face penalties as well as arrangement fees. Don't forget to add in surveyors' and solicitors' fees. So, if you're considering a remortgage, do your sums carefully. You may find yourself facing the equivalent of several months' mortgage payments, taking a serious chunk out of the financial benefits of remortgaging.

Find the best buy discounted rate mortgages

Top of Page

20 June 2008 © Moneyextra.com

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.