There are various reasons for remortgaging but usually, people remortgage because they're looking for a better deal on their mortgage. That often means a cheaper interest rate, but it could be that a different type of mortgage deal suits you better - perhaps you want to fix the interest rate you pay or want the option of offsetting your savings against your mortgage.
People used to take out a 25-year mortgage and stay with the same lender for 25 years until it was paid off. Now, though, more and more people are discovering the savings that can be had and choosing to switch from one lender to another when they can get a better deal.
It’s a good idea to keep an eye on the market to make sure you’re not paying over the odds for your mortgage. This simple action could save you thousands of pounds in interest over the life of your mortgage.
If you have enough equity in your home - the mortgage is quite small compared to the property's value - you can increase your remortgage loan and take out some of the equity. For example, you could use this for home improvements or to pay off debts.
Let’s look at some of the reasons for remortgaging in more detail to help you decide if it’s the right time for you to make the switch.
Your current deal is about to end
When you reach the end of your mortgage deal, you’re usually moved on to your lender’s Standard Variable Rate (SVR). Most of the time that means that your mortgage becomes more expensive, as the SVR tends to be higher than other mortgage rates - so most people want to remortgage to a better deal with another lender to avoid paying more than they need to!
The value of your home has increased
You could get a better deal if you have a lower loan to value (LTV) on your property. The loan to value ratio (LTV) is the size of your mortgage in relation to the value of the property you're buying or remortgaging, expressed as a percentage. So if you started with a 10% deposit, you would have required a 90% LTV mortgage. However, if you've now paid off a further 20% of your mortgage (and the property value has stayed the same), you'll now need a 70% LTV mortgage - and the lower LTV should mean that better mortgage deals are available to you. If your LTV has fallen a lot since you took out your original deal it could be worthwhile remortgaging to a better rate. Although if you still have time on a deal you’ll need to consider any Early Repayment Charges, which might apply if you switch before your current deal ends.
You want overpayment flexibility but your lender isn’t flexible
Overpaying your mortgage is a good idea if you can, especially if your interest rate is fairly low now and you expect it to rise in the future. Most lenders will allow some overpayments, but if you want more flexibility, you’ll need to find a deal that will allow this.
You want to borrow more
Fancy knocking through that wall to build an open-plan kitchen? Or maybe that avocado bath set has seen better days? Remortgaging may allow you to borrow enough to fund home improvements, which could add value to your home.
Significant home improvements, such as converting the loft or buying a conservatory, cost thousands of pounds, so remortgaging can be a cost-effective way of borrowing the money to pay for them.
An unsecured personal loan, however, could be better for borrowing comparatively small amounts. The interest rate will be higher and the monthly repayments more, but you'll repay the debt faster, so pay less interest overall.
You want to purchase a buy to let
If you want to become a landlord, remortgaging can be a good way to help get you started.
By remortgaging, you can release some of the equity in your home and use the money as a deposit on a Buy to Let property. Interest rates are usually higher for Buy to Let mortgages, so if you can free up money from your own home to put down on a new rental property, you’ll be able to take out a smaller Buy to Let mortgage.
It’s important to consider that you’ll then have to take out a larger remortgage on your own home. You’ll need to show lenders that you’ll be able to afford higher repayments on your property, and they may also want to know the details about the Buy to Let property you’re purchasing to make sure you’re not over-stretching yourself.
You want to buy another house
Remortgaging one property to buy another can be a good move, provided you've enough equity in your home. The process is the same as if you were to buy a Buy to Let property. You can free up equity in your current home to put down a bigger deposit for your new property.
As with a Buy to Let, you’ll need to be able to prove that you’ll be able to meet the higher repayments - but this time, you won’t have any rental income, so you must be able to show that you can pay both mortgages based on your income alone.
You wish to pay off debts
Stop and carefully think if you're wondering about remortgaging because you're struggling with debts.
Using the money you release from your home to pay off other debts can help because mortgages usually have a lower interest rate and a longer term than personal loans and credit cards.
You're right to take action to reduce your debts, but if you increase your mortgage to pay off other debts like credit cards or personal loans it’ll become secured against your home rather than unsecured. If you then find you can't pay your mortgage, you could lose your home.
Remortgaging to pay off debts can be worthwhile if you feel overwhelmed by your other debts and are confident that you can afford the remortgage payments.
However, although the interest rates are lower, you spread mortgage repayments over a more extended period than a personal loan and may pay more interest in the long run.
You’re getting divorced
Divorcing is a sad and challenging time for anyone, not least because you have to separate your finances. Your home is probably the biggest asset you have to split between you.
Assuming you own it jointly with your partner, you have three choices:
- Sell the house, repay the outstanding mortgage and split what's left
- Keep the house, take over the mortgage yourself and buy out your partner
- Allow your partner to take over the mortgage and buy you out.
If you want to keep the property yourself, you should talk to your lender straightaway to ask if you can raise enough to buy out your ex and transfer the existing joint mortgage to your name alone. Before agreeing, the lender will want to make sure you can afford the repayments on your income alone.
If the lender disagrees, you might be able to remortgage the property with a different lender. You'll become the property's sole owner, which involves legal work to transfer your ex's share to your name and take their name off the property’s deeds.
