Remortgaging explained

Recent changes in mortgage rates mean that millions of borrowers are paying more than they need on their home loan and would be better off switching to another deal. But for many, the mortgage market is just a maze of confusion, so how do you find your way through and work out what you should do?

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We take a look at what remortgaging is and what factors you need to consider when comparing mortgage products.

What is remortgaging?

Remortgaging is the term given to the process of switching onto a new mortgage deal – either with the same or a different lender. The most common time to remortgage is when the fixed or introductory tracker or discounted rate on your mortgage ends.

Once this happens, you will be moved onto a long term variable rate – usually your lender’s standard variable rate (SVR) – and historically this has tended to be higher than the rates available on new mortgage deals, which is why so many people switch at this point

What do you need to consider when remortgaging?

Fixed vs variable:

You tend to pay a higher rate (initially) if you opt to fix your mortgage rate as opposed to going for a tracker, but this is not surprising given the security you have of knowing exactly what your monthly repayments will be for the next few years. For some people, this premium will always be worth paying, particularly if you need to budget carefully.

However, others will be happy to take a bit more risk and go for the variable rate option in order to take advantage of lower monthly payments in the short term at least.

The cheapest tracker is currently 2.39% compared with 3.29% for the lowest two-year fix, so base rate would have to rise by one percentage point before your monthly repayments on the tracker would be higher than those on the fix.

The problem with base rate moves is that no one knows when they’ll happen and there’s little point in trying to second guess them as you probably won’t get it right. The most important thing is to go with what you’re comfortable with: if you are worried that your mortgage payments may rise and become unaffordable, go for the security of a fix.

Arrangement fee:

The mortgage with the lowest rate may not actually be the cheapest deal. It’s vital to factor in the impact of arrangement fees as well, because you may find that it is actually cheaper to pay a slightly higher rate of interest if the set-up costs are lower – this will depend on how much you need to borrow. If you are borrowing a large amount, it can be worth paying a larger arrangement fee in return for a low interest rate but on smaller loans it may be better to opt for a higher rate in return for a lower set-up fee.

The key is to work out how much you would pay in total – so monthly payments and fees - over the term of your mortgage. For example, Santander has a two-year tracker at 2.49% with a £995, while Yorkshire Building Society has a two year tracker at 2.64% and a £495 arrangement fee. Despite the higher rate, the Yorkshire deal is actually cheaper over the two-year terms on loans below £280,000 because of the lower fee.

Other fees:

Don’t forget that even if you are remortgaging there will be legal and valuation costs to factor in as well. These will be lower than if you were buying a house but your new lender will require a valuation survey and a solicitor will need to do the paperwork. Some mortgage products include a free valuation and legal work for those remortgaging so it may work out cheaper in the long-run to opt for one of these products than to go for a lower-rate deal that doesn’t come with any freebies.

If you are unsure about how to work out what the best deal is, a mortgage broker will be able to help.

Deposit:

The amount of equity you have in your home can really make a difference to the competitiveness of the mortgages you’ll qualify for. In order to be get the best rates available at the moment you really need a deposit of at least 25% - in some cases more.

Early repayment charge:

How long do you want to be tied in to your current mortgage deal for? This is an important thing to consider when you’re comparing mortgages because most products will levy an early repayment charge (Erc) during the introductory period. So with a two-year fix or tracker for example, you will probably be charged a penalty to get out of the deal during the first two years.

With shorter term deals, being tied in in this way isn’t usually too much of a problem. Where it becomes more of a potential problem is with longer term deals such as 10-year fixes, because a lot can change during that time and if circumstances do alter it can literally cost you thousands of pounds to get out of your mortgage early.

Not all products have an Erc, however. Most lifetime trackers for example, are completely penalty-free, making them a highly flexible option.

Exit fee:

When you come to remortgage, you will be charged an exit fee by your current lender. This is to cover the administration costs of closing your existing mortgage account. Costs vary depending on the lender: the most you’ll be charged is around £295, but in many cases it could be less.

The fee will be stated on your original mortgage offer and a clampdown by the Financial Services Authority a few years ago, means that lenders can’t alter the exit fee during the term of your mortgage.

How to remortgage checklist

  1. Check the worth of your property.
  2. Assess what you owe on your mortgage by asking your lender for a redemption statement or check your mortgage statement.
  3. Decide the type of mortgage you want (interest only or repayment remortgage).
  4. Find a deal by comparing mortgages with MoneySuperMarket.
  5. Ensure you’re saving money by remortgaging. Our mortgage affordability calculator can help you with this.
  6. Apply and once complete, your solicitor will arrange the transfer of the funds to pay off your old mortgage

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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