People sometimes think of remortgaging only in association with moving house, but homeowners remortgage for several reasons; they may wish to free up equity in order to carry out home improvements or pay off debts, or reduce the length of their mortgage.
In its simplest term, remortgaging simply means switching your mortgage from one lender to another, and the main reasons for doing so are:
- To switch to a cheaper deal (ie get a better interest rate). Staying on a lender’s standard variable rate (SVR) usually means paying over the odds – although this is not the case at present, given the extremely low Bank of England base rate. Mortgagees revert to the SVR when their existing mortgage deal comes to an end, and, as above, this is OK at present. However, it really does pay to find a cheaper deal if you can: a monthly mortgage payment of £1000 at 7.5% is reduced by an incredible £170 per month on a new rate of 5.5%.
Remember to take into account redemption penalties (if applicable) and arrangement fees. Make sure that these costs are factored in when working out whether it is worth remortgaging or not.
- To release equity, in order to free up money for home improvements or to help with bills. In view of the current economic climate, think hard about remortgaging for this reason – would you be able to comfortably afford the repayments? If not, you could potentially lose your home. However, in the current economic climate it is easier and cheaper to extend your current home rather than move. If you want to add an extension or loft conversion, remortgaging is one way of raising the money. Lenders often offer special discounted interest rates for those who are looking to improve the energy efficiency of their home.
- Regarding debts, it may be benificial in certain circumstances to use your equity to clear bills; a mortgage rate is usually much lower (typically around 5-6%) than interest rates charged on credit cards (around 16%). Always seek specialist advice before doing this.
- To extend or reduce the term of the mortgage. Extending your mortgage term may reduce payments, but will take longet to pay off and thus more interest will be paid. Reducing the term means that the mortgage will be paid off sooner and money saved in interest.
- Moving home
- Some homeowners use the equity in their property to put down as a deposit on a buy-to-let mortgage. If you are thinking of doing this, make sure you thoroughly research the viability of what you are intending to do, and the implications should things go wrong.
- The criteria surrounding remortage deals has been tightened as a result of the credit crunch, and most lenders demand deposits of at least 15%, with the best deals being reserved for those with deposits of 40% or more. This may mean that those who put down little or no deposit and those whose homes have fallen into negative equity may have trouble remortgaging.If you cannot remortgage due to the reasons above, try not to worry too much: staying on your lender’s SVR is okay for the time being, given the competitive interest rates. There is signs that the housing market is improving, and thus you should be in a position to remortgage once property prices start to rise.
Tracy North from uSwitch.com comments:
“Remortgaging is a minefield of complicated information so consumers really need to do their home work. At the moment there are some competitive deals around but, when you dig around a little, you may actually find that the high fees associated with these deals completely negate the low interest rates offered. Adding these fees onto your new mortgage balance may seem like a quick fix but consumers must remember that paying back a £1,000 fee over 25 years is probably the most expensive loan they could possibly have.”
When you do remortgage, it is important to look for one that offers flexible features, such as overpayments, underpayments and payment holidays. As the current recession has shown, such features are a godsend when money is tight. Similarly, the overpayment feature allows you to pay more off your mortgage when your finances allow it.