Pros and Cons of Remortgaging
The process of remortgaging your home and changing your mortgage deal can be daunting. Most of us will only change our mortgage several times in our lives. Many of us won’t review our mortgages for at least 2 years while we’re in a special rate or deal.
In our Guide to the Pros and Cons of Remortgaging, we’ll explain how the process works and what you should be looking for. There are a number of questions that we’ll aim to answer for you and look at what the potential problems are.
What is a remortgage?
A remortgage is an extremely common process in the mortgage markets around the world. Put simply, it is where a mortgage borrower (you) will settle your existing mortgage debt with another loan or mortgage deal.
You can remortgage with your existing lender, commonly known as a ‘product transfer’, which is the easiest and quickest type of remortgage. Most product switches won’t require any additional underwriting or financial evidence. The main difference here is that your mortgage amount (balance) and term (period), will usually remain the same.
The other common type of remortgage, is a full remortgage, which is where you might change one or all of the following:
- Loan amount
- Mortgage term
- Deal or Rate
Remortgaging your property can allow you to review your existing mortgage situation and then potentially improve your rate, deal, or term.
What are the advantages of remortgaging?
There are a number of reasons why you might want to remortgage and it provides you with a number of financial opportunities.
The most common and biggest advantage to remortgaging is simply to reduce your mortgage rate, and to save money. At the end of every special deal period, all mortgage products will revert to the lenders Standard Variable Rate (SVR). The SVR is almost always a higher rate.
Another option to reduce your repayments at the point of a remortgage is to extend your mortgage term. By extending your mortgage term, you will undoubtably reduce your mortgage repayments every month.
One of the other major options for remortgaging is to raise money for many reasons, the most common reasons for capital raising are:
- Debt consolidation
- Home improvements
- Purchase goods
- Deposit for another property (e.g. Buy to Let)
- Gifted deposits (for children)
If you’re not sure quite how a remortgage would work for you property, you can find out more in our guide ‘How does remortgaging work?’.
How many times can I remortgage?
Unbelievably, there is no actual limit to the number of times that you can remortgage your home.
Most of us will remortgage our property at the end of a special deal period which is usually around every 2 to 5 years. At this point, your mortgage rate will revert to the lenders Standard Variable Rate (SVR), which is usually around 2% above the BoE Base Rate.
There are several things to think about when remortgaging which can have an impact on your credit score. If you do this too often then you might cause your credit score to drop due to multiple mortgage credit searches.
Lenders might also be cautious about lending to someone who has remortgaged too often and therefore have questions about the reasons for this.
When should I remortgage?
The most common point to remortgage is when your special rate or deal comes to an end. At this point your rate reverts to the lenders Standard Variable Rate (SVR).
Most people don’t know that you can review your mortgage and secure a new rate up to 6 months before the end of your special deal. By securing a new rate or deal, you can remove any uncertainty about mortgage or interest rate rises.
The best time to remortgage will be based on a combination of rates, credit score, income, and requirements.
When not to remortgage
It is just as important to know when it is not a good time to remortgage your home, and there are several reasons for this.
One of the most important factors in when not to remortgage is when you are tied in to a deal with an Early Repayment Charge (ERC). This charge means you would have to pay a fee if you switch or pay off your mortgage before the end of the mortgage term. Most lender ERC’s will be between 2% and 5% of your outstanding mortgage which can be a significant amount of money.
Another key element to remortgaging is where you have a lower credit score or if you have recent credit history problems. If you’ve got recent credit history problems, then it could have an impact on the mortgage rate that you will be eligible for.
Some of the most common credit issues are:
- Missed payments (e.g. credit cards, loans, store cards, etc.)
- Mortgage arrears
Two other major factors are your income and any debts that you have outstanding, which will affect your affordability. You might not be able to remortgage your property for the right amount if your income is not in the right place.
Remortgage to borrow more money
It is possible to increase the size of your mortgage and borrow more money, within reason, depending on your property value and your affordability.
Capital raising on a remortgage is also very common and people can use this money for a number of reasons. Lenders will always want to know why you are borrowing extra money to see whether there is any risk to them.
One of the reasons that you might not be able to borrow extra money against your home is for business purposes. Mortgage lenders don’t usually allow borrowers to use their property to raise money for a business or corporate purpose.
Remortgaging for debt consolidation
One of the biggest reasons for remortgaging to raise money is for debt consolidation purposes, to reduce monthly outgoings.
Most of us will consistently have debts such as credit cards, unsecured loans, store cards and other types of credit. Each of these debts will have a minimum repayment or a monthly repayment that you will need to make.
Sometimes our circumstances can change and it can become difficult to meet these repayments each month. An option at this stage is to review your mortgage to see whether it would be easier and beneficial to consolidate your debts in to one payment.
You should always remember that by consolidating your debts that you will be extending your credit period. Often this will cost you more in the long-run.
Remortgage for home improvements
Another option is for a mortgage borrower to remortgage their property to raise money for home improvements.
There are some useful benefits to this which is usually to increase the value of your home and increase your living space. The most common type of home improvement remortgage is to extend your existing home to create more space. Improvements like this will inevitably increase the value of your home.
Most common home improvements from remortgages:
- Conservatories or Orangeries
- Loft conversions
- Double glazing or insulation
- Repairs or maintenance
Remortgage for gifted deposits (for your children)
Another quite common reason for someone wanting to remortgage their home is to give their children money for a deposit for a house.
It is increasingly more difficult for young adults to raise sufficient funds to be able to purchase their own home. An option for you at this point, is for you to use the equity in your own home to gift a deposit to them.
Fix your mortgage
When your existing mortgage deal comes to an end then you will automatically revert to the lenders Standard Variable Rate (SVR).
The main point about this is that your mortgage will no longer be fixed and can go up and down. A variable rate will usually change in line with the Bank of England Base Rate which can be unpredictable and difficult to budget for.
Reduce your mortgage payments
You can also remortgage to reduce your mortgage repayments. This process can be as simple as a product transfer with your existing lender.
Once your mortgage rate reverts to the lenders SVR then your repayment will undoubtably increase by several % points. At this stage, you have the option to remortgage to reduce your monthly mortgage payments and without any penalty.
Remortgage to manage your credit score
This might seem strange to think that you can remortgage your home to help improve or manage your credit score.
Another term for this is a ‘credit repair mortgage’. This is simply where you would remortgage for your property to increase your credit score or to avoid bad credit. This has historically been more common where interest rates were higher and there may be other economic factors.
If your credit score is going down or if you have issues with poor credit, then your mortgage can help with some credit issues. Some people will use their remortgage to repay debts and to prevent credit problems such as missed payments, IVA’s and CCJ’s.
There are several key factors to remortgaging to manage your credit score, such as:
- Mortgage rates (may be higher)
- Charges and fees
Costs of remortgaging
One of the biggest drawbacks to remortgaging your property can be the costs by the lender and any other fees.
There are several common charges and fees to consider when remortgaging, these include:
- Early Repayment Charges (ERC’s) *if applicable
- Lender fees (special deals especially)
- Valuation fees (if applicable)
- Mortgage broker fees
- Administration and Bank Charges
Finding the best remortgage deals
If you are looking to remortgage, it can be a good idea to get some advice from someone who knows what they are talking about first. You can speak to a qualified mortgage expert who can provide you with advice and guidance.
This can save you thousands of pounds over the term of your remortgage and especially with larger loans, as experienced brokers will know where to look for the best deals. You could approach your current lender directly if you think you may be able to get a good rate as an existing customer. It’s also possible to apply to new lenders directly without advice, but if doing so it can still be wise to shop around first. Ultimately, the decision is yours and you do have a few options to choose from.