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How does remortgaging work?
Remortgaging happens when you change the mortgage you currently have on your property, either by switching it to a new lender, or by moving to a different deal with your existing lender.
How much can I borrow with a remortgage?
The amount you’ll be able to borrow when you remortgage will depend on your own financial situation. Lenders will look at your income and expenditures as well as your credit report to get a picture of your finances, and they’ll lend you what they believe you’ll be able to pay back.
How much does remortgaging cost?
The main cost of your remortgage will be decided by the interest rate your lender sets. They’ll usually decide this by considering the following factors:
- Your loan to value
- Your credit history
Are there any fees involved in remortgaging?
You should always factor in the fees you’ll need to pay before remortgaging, which can include:
- Arrangement fees: most mortgages have arrangement fees which can cost up to £2,000.
- Legal fees: you might also have to pay for a solicitor to take care of any legal matters if you’re looking to remortgage with a different lender.
- Admin fees: the lender might charge for the cost of setting up your remortgage.
- Valuation: you’ll need to have your property valued so the lender can see if it’s worth the amount you’re remortgaging for.
What types of mortgage can I take out?
You’ll likely find the same options as if you were taking out a first mortgage when remortgaging. The most common remortgage deals include:
Remortgaging with a fixed rate deal
A fixed rate mortgage is when the interest rate stays the same for a set amount of time. This can be a good option if you want peace of mind that your repayments will stay the same each month. Most fixed rate deals run for between two and five years, although some are longer.
Fixed rate mortgages are the most popular mortgage type for people looking to remortgage, according to MoneySuperMarket mortgage comparison quote searches from January 2016 – July 2018.
Remortgaging with a tracker deal
Tracker mortgages have variable rates that track the Bank of England base rate at a set percentage above or below it.
If the Bank of England’s base rate rises or falls, the interest you pay on your monthly mortgage repayments will do the same. This can be good when rates are falling, but you’ll need to be sure you could afford your repayments if rates went up.
70% of consumers looking for a tracker mortgage are remortgaging, according to MoneySuperMarket data January 2016 – July 2018.
Other mortgage types to consider
Other mortgage types you might want to consider if you’re looking to remortgage include:
- Capped rate mortgage: a capped rate mortgage is a variable rate mortgage, but there is a limit to how high the rate can go. This can be useful if you want a variable rate mortgage, but also want to avoid unaffordable payments if the rate rises.
- Discounted mortgage: a discounted mortgage is another type of variable rate mortgage which offers a discounted rate on the lender’s SVR for a certain period of time.
- Offset mortgage: an offset mortgage helps to reduce the overall interest you pay by offsetting your savings against the outstanding balance of your mortgage. But this does mean you won’t be gaining any interest on your savings during the deal.
Fixed rate mortgages
Fixed rate mortgages have an interest rate that stays the same for a set period. This could be anything from two to 10 years. Your repayments are the same every month and you don't need to fear fluctuations in interest rates. Most will charge you a penalty - known as an early repayment charge (ERC) - if you choose to leave the deal before the end of the fixed term.
Variable rate mortgages
Interest rates adjust periodically with a variable rate mortgage, which means repayments may change throughout the loan term. Usually, the interest rate changes in relation to another rate - the Bank of England's base rate is very influential on variable interest rates, as is the base rate of each lender.
For standard variable rate (SVR) mortgages, each lender has an SVR that they can move when they like. In reality, this tends to roughly follow the Bank of England's base rate movements. SVRs can be anything from two to five percentage points above the base rate – or higher – and they can vary massively between lenders.
Discounted variable rate mortgage
The other type of variable mortgage is a discount mortgage. Rather than being linked to the Bank of England base rate, discounts are linked to the lender's standard variable rate (SVR). For example, if the SVR is 4.50% with a discount of 1%, the payable mortgage rate is 3.50%. If the SVR rose to 5.50%, the pay rate would rise to 4.50%.
The problem with discounts is that SVR changes are at the lender's discretion so your mortgage payments could change even if there has been no alteration in the Bank of England base rate. What's more, even if the SVR changes following a move in the base rate, there is no guarantee that it will increase or decrease by the same amount.
As a result, trackers are usually seen as more transparent than discounted deals and are often seen as being fairer for the borrower.
When the base rate fell from 5.00% to 0.50% between October 2008 and March 2009, for example, Lloyds TSB was the only top 20 lender to reduce its SVR by the full 4.50%. All the others cut their rates by less.
When the Bank of England raised the base rate from 0.25% to 0.5% in November 2017, anyone who wasn’t on a fixed rate mortgage was at risk of seeing their repayments increase. A number of leading mortgage lenders followed and increased their tracker and/or SVR rates a month later.
Mortgage fees explained
Most mortgage deals carry arrangement fees, which can vary from a few hundred pounds up to a couple of thousand.
Also bear in mind that these set up costs can sometimes be made up of two fees. An increasing number of lenders charge a non-refundable booking fee, which is effectively a product reservation fee. If your house purchase falls through and you don’t end up taking the mortgage deal, you won’t get this fee back.
The second type of fee is an arrangement fee which you pay on completion of the mortgage so you won't have to pay it if, for any reason, you don't take the mortgage.
Consider the fees
Remember to always factor these into the overall cost of any deal. Even if a lender is offering a seemingly unbeatable rate, steep fees could mean that it actually works out to be more cost-effective to opt for a higher rate, but with a much lower fee, or no fee at all.
The best mortgage rate for you depends on how much you are looking to borrow. A high fee is often worth paying in order to secure a low interest rate if you are applying for a large mortgage. But those with smaller mortgages could be better off opting for a higher rate and lower fee.
However, while this is the general rule, it is well worth crunching the numbers when you are comparing mortgages - you need to work out the total cost over the term of the deal. For example, if you are going for a two-year fix you need to work out the cost of your repayments over the term. You can do this by finding out what the monthly payment will be using our mortgage calculator – and then multiply by 24. You then need to add on the arrangement fee to find out the total cost.
You will likely find that you have more mortgage deals available to choose from if you have a good credit history, so it’s worth making sure that your credit report is as good as it can be before applying for a mortgage. Steps like paying off any outstanding borrowed credit you owe and making sure your current address is on the electoral role can help to improve your credit score.
Save a deposit
The more money you can save as a deposit, the less you’ll need to borrow as a mortgage loan – and having a bigger deposit can help you get access to more competitive mortgage rates. Lenders will often have a maximum loan to value they’re prepared to offer you, and the rest will need to be made up with either a deposit or an equity loan like the government’s Help to Buy equity loan scheme.
Compare mortgage deals
Using a mortgage comparison tool can help to give you a better idea of how much you’d need to pay in monthly costs and interest, the duration of the deal, the maximum LTV and any product fees you may need to pay for the mortgage deals available based on your borrowing requirements. It’s important to remember though that the actual mortgage deals you’re offered when you go to make an application may differ because they will then be influenced by your financial situation and credit history.
Looking for mortgage advice?
Get free mortgage advice, and see deals from the whole of the market, with broker London & Country. Call free from your landline or mobile on 0800 170 1943 any day.
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