How Does Remortgaging Work? Remortgages Explained

Malcolm

Hello, it's Malcolm, and today, Wayne and I will be talking about remortgaging. I suppose one of the big reasons people decide to remortgage is merely getting a better interest rate?

Wayne

Absolutely. You might be coming to the end of your existing deal and you want to see what's available to you. If you don't do anything about it, you never know if you could beat either your current deal that you're on, or the standard variable rate that you might be able to go onto.

Malcolm

People get used to switching products from their car insurance and home insurance every year. Unfortunately, switching your mortgage is not as easy as a few clicks because to change lender, they've got to assess you as a brand-new applicant. So, it does take longer.

Wayne

It does. There are definitely more hoops to go through. There's a bit of legal work involved, because there's a legal mortgage deed that secures the lawn to your property and you need a new one. But the rewards, generally speaking, are worth it. Why would you just want to sit on the standard rate?

You probably wouldn't sit on the highest rate that your electric company are charging you, so why do you want to do that with your mortgage?

Malcolm

It’s fascinating because everyone will swap their gas or electric to save a couple of pounds per month. However, they could save between £100 to £200 by changing the lender.

But we still come across customers just sitting on a standard variable rate. Why do you think that still is?

Wayne

People don't think about it. If they can afford it, why worry?

Going back, remortgaging wasn't an easy thing to do. Customers remortgaged and paid extra for the privilege. Remortgaging was only used on people who were in trouble and needed to raise capital for debt consolidation.

Back then, lenders used to charge you more when the market started becoming more competitive, and lenders began to compete against each other.

The only reason anybody is sitting on a standard variable rate if they knew that they’re going to be selling it reasonably quickly and wanted to keep their options open if they plan to be moving to a different property.

Another situation is if you've got a large sum of money coming in, and you know that you're going to be in a position where you might want to make a significant capital reduction, then that might be a reason for sitting on it.

But other than that, you'd be better off looking at actually saving yourself some money.

Malcolm

Your existing lender may or may not offer you a product transfer mortgage to stay with them.

Why don't lenders automatically put a customer on a new two-year fixed rate when their two-year fixed rate comes to its end?

Wayne

It's because they cannot change your terms and conditions without you agreeing to that.

When you come to the end of the deal, you'll go on to standard variable risk in your terms and conditions if you did nothing. They've not changed anything at that point.

That's what you agreed to in the first place. If they wanted to change it onto something else, they need your agreement. We advise customers that if you think you might do a product transfer, it's worth considering what products you will switch to; there might have a two or five-year fixed rate or a tracker mortgage.

As advisors, we would look at that and work out, which is the right product.

Malcolm

What're the impacts of a customer deciding to hook into one of those new deals without taking advice? What kind of pitfalls would they expect?

Wayne

Maybe a customer wants to tie themselves into something with early repayment charges that they've overlooked.

If they moved later on down the line, it could incur a penalty that they did not foresee. With us, as advisors, we're regulated, and we justify why that is the right thing for them to do.

We can say that if the product transfer is the right thing for you to do, we will recommend it. If it's not, and there is a better option for you, we'll recommend that.

Malcolm

Some people take the opportunity to see when their remortgage is due to raise capital.

What kind of reasons do people look to raise capital against that property when they're remortgaging?

Wayne

It could because they're looking to remortgage for home improvements , especially if they've been on a product that was at a high rate. You often find that we could get those home improvements done and get a lower rate, and we don't even pay any more each month.

Some people choose to remortgage to help their children make a deposit on the property; other times, it might be debt consolidation. We would need to look out for around that, but it could be any of those reasons.

Malcolm

Like you mentioned, there's always some work because we're taking off that first is legal charge and replacing it with a new lender's charge.

When you swap lenders, it tends to be that you'll get some cashback from the lender to pay for that. Essentially, that legal work comes as free. However, there could be some additional legal fees to pay if you're adding someone onto your mortgage or taking someone off

Wayne

That's right. Anything that will change the property's legal ownership, divorcing, or getting a new partner. That's going to change the legal ownership. Anything like that would typically incur additional legal fees.

Whereas, if it's just two partners on the mortgage with lender A, and they wish to switch to the two partners on the mortgage with lender B, then typically, it wouldn't be any extra-legal work.

Usually, your cashback would cover the cost of that which is fairly straight forward.

Malcolm

We do find that customers sometimes leave it a bit too late before applying for remortgaging.

That's one of the other ways that you can end up almost by default on the lender standard variable rate.

We strongly recommend applying for a new deal and get locked into it well in advance, if your current deal is coming to its end.

Wayne

A product transfer, typically maybe three months before your deal comes to an end, the lenders would probably allow you to switch. If that's the right thing, that's what we'd recommend.

If you choose to apply early, most new lenders will give you a mortgage offer that would last at least three months. Most lender nowadays has extended that to six months, which is well in advance of your deal coming to an end.

Malcolm

This can help protect you in an environment where interest rates are going up. You can lock into that deal much earlier.

You always have a strange crossover month when your remortgage happens because a mortgage payment is usually payable on the first of the month. You'll pay your mortgage payments to your current lender.

If you completed, let's say, on the 10th of the month for your new mortgage, you get to a situation where your first lender 10 days interest and the last 21 days with a new lender.

It's a messy situation, but don't worry if that happened because lender A will refund you the mortgage interest that you've overpaid in that example there.

There's lots of reasons why it's a good idea to look at remortgage advice. You shouldn't ever end up paying a standard rate of interest in 99% of cases.

What we like to do here is build up an ongoing relationship with all our clients so that we're not getting just the best deal at the outset of the mortgage, but you stay on the best deal that's available to you, right the way through the term. And that can save you thousands of pounds worth of mortgage interest.