A remortgage is when you switch from your current mortgage to another product with either the same lender or a new deal from a completely new lender. This doesn’t involve moving home, but does mean replacing your financial arrangement on the property with another. In most cases, a remortgage is done to get to a better rate or unlock extra funds.
When you sign a mortgage agreement and move in, you aren’t locked into the same rate for the entire repayment period. At the end of this period you would revert back to the lenders Standard Variable Rate which in many cases may be higher than your current rate. During your initial tie-in period there may be penalties for switching your mortgage however, outside of this you can look for a better deal. So, if you feel your agreement is no longer providing the best value, you can shop around then make the switch over to a completely new product.
Fixed rate, tracker, and discount mortgages usually have a period of 2–5 years where you benefit from a fixed interest rate, but once this expires, most providers will switch you to their standard variable rate (SVR). It is good practice to review your mortgage around 3 -6 months before the existing deal expires otherwise you may go into a ‘payment shock’ when your interest rate automatically reverts to your existing lenders Standard Variable Rate if this is higher than the special deal you originally had. If you are an existing client of ours we would contact you automatically regarding your mortgage review. If you are new to Money Cornershop get in touch now to discuss your next arrangement.
Even if your initial tie-in period is ongoing, you might want to find a mortgage with a better rate to save money each month.
However, while you could find the product you’re looking for, you need to consider any early repayment charges that could eat into any savings you are on course to make. This is especially true if you are still within your initial deal, as these fees can often add up to as much as 2–5% of your outstanding loan.
Has your property’s value risen since you first took out a mortgage? Or have you repaid a significant amount of your mortgage over the years? The increased worth of your home and repayment of your mortgage may have improved your loan-to-value ratio (LTV), something that can give you access to lower rates if you were to remortgage.
The LTV ratio is how much mortgage you have in relation to how much your home is worth. It is often given as a percentage, representing how much of the home you have mortgaged, with the portion you own known as equity.
An increase in your home’s value can lower your LTV in your favour, as it boosts the amount of equity you own. For example: if your property was originally worth £100,000 and you took out a mortgage of £90,000, you would have an LTV of 90%. However, if your home value increases to £120,000, your equity would increase with this too, giving you a new, lower LTV of 75%.In addition, repaying your mortgage can also increase equity in your home, raising the share of it you own. Using the same example: a £90,000 mortgage on a £100,000 home (90% LTV) could be reduced if you repaid £10,000, so you only owed £80,000 at 80% LTV. Both repaying your mortgage loan and an increased value can work together to lower your LTV ratio.
The higher the LTV, the higher the risk to the lender, which is the reason why a reduced LTV would give you access to lower interest rate mortgages.
When you’ve built up equity in your home by paying down your mortgage or thorough an increase in property value (or a combination of both), you may want to release some of it for other purposes. There are quite a few reasons why you may want to access extra money, such as paying for retirement, home improvements, consolidating debts, or buying a new car. One of the ways you can do this is by remortgaging, where you take out a new deal to borrow more money than your current mortgage amount, allowing you to access a cash lump sum.
If you have a non-fixed-rate mortgage, such as a standard variable, tracker, or discount mortgage, then an increase in the Bank of England’s base interest rate can mean your mortgage payments are in line for an increase too. This is because they use the base interest rate to calculate how much your repayments should be so, if there is a hike, you will be charged more to reflect this. If this is the case, you may well consider remortgaging to a fixed-rate mortgage to ensure you’re protected.
Though they are more difficult to secure than before the 2008 financial crash, some lenders still offer interest-only mortgages that only require you to pay the interest on your loan each month, rather than loan repayments plus interest. If you’ve taken out one of these mortgages or have one from before 2008, you may reach a point where you want to switch over to a repayment mortgage instead.
Most lenders don’t have a problem with this, and they will let you make the change without having to go through the remortgaging process. However, if you want to start making repayments and get a better deal at the same time, you will most likely have to remortgage. If you still want to keep your repayments at an affordable level, it may be possible to find a new deal over a longer term that will allow for this.
If you come into an increased amount of money, perhaps through a pay rise or an inheritance, you may wish to overpay on your mortgage to make more progress with your repayments. However, it might be the case that your current deal does not allow you to do this or restricts the amount you can overpay.
By remortgaging, you could switch to another deal or provider that allows you to make larger overpayments, reduce your loan amount, and access a lower rate for the future. Just be sure to calculate the cost of doing so, including any exit fees, and compare it to your potential savings.
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