If you are an existing homeowner with your own mortgage to your name already, you have probably come across the word remortgage before. This may have been online when carrying out your own research, speaking to a mortgage advisor or just in passing conversation.
It’s a common part of the home owning cycle, with many homeowners planning ahead for the next few years of their journey. Though it is a widely discussed topic, if you haven’t come across it before or simply don’t understand what it means, you may be wondering what it’s all about.
To explain it in a simple, jargon-free way, a remortgage is the process of taking out a new mortgage on the property you already own. This is either done to replace your current mortgage, or to borrow money against your property. It is widely perceived to be an effective means of saving money on your monthly mortgage repayments.
In most cases, you will not need to put down a deposit to take out a remortgage, with the importance this time around being focused more on the equity in your property. Equity is the difference between the value of the property and the amount that is left on your mortgage balance.
So let’s say for example, your property is worth £100,000 and you borrowed £90,000 (putting in a 10% deposit when you purchased the property). You fixed into your mortgage for 5 years, and at the end of those 5 years your mortgage balance is now £78,000. This means that you now have £22,000 equity in your property.
Many people look to remortgage to save money. As when the fixed period of your mortgage ends, you will automatically move onto your lenders’ standard variable rate of interest (SVR).
This interest rate is usually higher than that of the fixed rate you have just come off, therefore your monthly mortgage payments will increase as you will be paying more interest.
It may also be something that can help your financial state, as it can be a means to raise some capital. Below are some popular reasons as to why people choose to remortgage.
The idea of remortgaging for better rates is a popular one amongst homeowners. The way this works is as follows; Say your home is worth £100,000 when you first buy it. You put down a 10% deposit, meaning you require a £90,000 mortgage which you take out over 25 years, fixing your rate for 5 years.
Once your 5 year fixed period has ended, you’ll have paid off a portion of your mortgage. Let’s say you now have £78,000 left to pay, but your property is now worth £110,000, as the value has gone up. You will now technically be on a much lower loan to value. By remortgaging your property at this point, you’ll open yourself up to even more mortgage options, with better interest rates.
Doing this will also potentially allow for you to either keep the same term (let’s say you agreed to 25 years initially), but paying back less per month. Alternatively, you can keep the same monthly payments, but opt to reduce your mortgage term, paying back less interest overall.
As touched upon earlier in the article, equity is the difference between the value of the property and the amount left on your mortgage. You can remortgage to release equity for a variety of different means, with popular reasons including debt consolidation, home improvements and raising funds for a gifted deposit, to name but a few.
Generally speaking, so long as there is a good amount of equity sitting within your home and the payments are affordable, you will have a variety of options available to you as a homeowner looking to remortgage to release equity.
Depending very much on personal and financial circumstance, a debt consolidation remortgage can be a true lifeline for some homeowners. Perhaps over time you’ve let a credit commitment run too high, you’ve missed a personal loan and racked up interest.
In times like these it can feel like you have run out of options, but if you own your own home, you may not be out of options just yet. Debt consolidation remortgages can help you to reduce your current monthly outgoings, by taking any unsecured debts that you currently have outstanding, and adding them onto your mortgage.
This not only makes your monthly payments more manageable, but it will also be securing your debts against an asset, your home. Whilst this can be truly life changing for some, it is not a step to be taken lightly. Of course this means you will likely be paying back a lot more overall on interest, and if you miss any payments, you could lose your home.
It is a very risky, but oftentimes rewarding option for homeowners, though expert mortgage advice should always be sought out before making any hasty decisions and securing any debts against your home with a remortgage for debt consolidation.
If you are a homeowner and have lived in your property for a while, you may feel like you want a change.
Are you a young couple looking to start a family and need some extra space? Maybe you are working from home and are in need of a home office? Perhaps after a surge in popularity during the pandemic, you quite fancy creating a home bar at the end of your garden?
Whilst in most cases (especially if you are or have recently been a rental tenant) you would just think to move home and find somewhere else more fitting, you may actually have the option to remortgage for home improvements. This is good news for anyone who has grown quite attached to their home.
Hearkening back to when we discussed equity, if there is enough sitting in your property you may be able to remortgage to release equity for extra funds to make those changes you were hoping for. It’s worth remembering that some of these works may require planning permission, as well as estimates for the lender before they can agree to your mortgage.
When regarding finance, the word “capital” just means money. With that in mind, capital raising is basically just the act of raising money for a specific purpose. The ways in which capital can be raised when remortgaging include; releasing equity (which we touched upon above), a further advance or a second charge mortgage.
A further advance can come in handy if your home has increased in value and you would like some extra funds released. It is an additional mortgage that will typically be taken out over a longer term, with lower interest rates than a standard personal loan.
It is great for people who don’t want to remortgage, though you will be paying it back alongside your existing mortgage and there is a higher risk of repossession if you cannot keep up your monthly payments.
A second charge is similar to a further advance, being an additional mortgage that will run alongside your existing one. The difference here, is that it will typically be with a different lender and on a different rate. In the event of repossession, the primary lender is paid back from the sale of the property, with anything left being paid to the second lender.
There are a variety of reasons why homeowners may take these routes. They can be for home improvements or to consolidate debts. Alternatively, other popular options include raising funds to gift a deposit to the homeowners children, to pay for larger payments such as a car, or to pay for a much needed holiday.
The Financial Conduct Authority does not regulate some types of buy to let or commercial mortgages.
Throughout the course of your mortgage, you’ll no doubt be pondering what to do next. Some homeowners may be wanting a second home to their name, whilst others may be drawn to the prospect of investing in a buy to let property, forming their own property portfolio.
For the most part, if a homeowner has legitimate cause for a second home, be it a home away from home for long distance commuters, a family holiday home or a home for retired parents, a mortgage lender will be willing to allow for an additional residential mortgage.
The buy to let industry can be a fruitful one, with many rewards depending on your short-term or long-term plans. In the short-term, you may be better suited for an interest-only mortgage, wherein you’re only paying interest on a monthly basis, allowing you to maximise your profits.
You will have to pay back the capital on an interest-only at the end of your term, though hopefully by that point it has gone up in value, meaning you can sell the property and use the funds from that to pay the remaining balance. Alternatively, if there is enough equity in the property, you can remortgage your buy to let and pay the capital off that way.
For the long-term, you may be better suited for a repayment mortgage. Doing so won’t maximise your potential monthly profit, as you’ll be paying back capital as well. That being said, you won’t have a lump sum to pay off at the end like an interest-only mortgage, and once your term has ended, you’ll completely own your property outright. This will mean no monthly payments on your part, whilst still making rental income.
Depending on the amount of equity sitting in your property and your affordability, you will be able to remortgage to release equity as a means of funding the deposit for any of these additional property purchases. In the case of a buy to let, the lender will stress-test the projected rental income against the mortgage. Oftentimes, the income you generate from having a tenant will cover the mortgage costs.
In addition to the above points discussed, a mortgage lender may also be willing to allow you to release equity to fund the deposit for a commercial property that you will use for a business. Criteria for this varies dependent on lender, however.
So as we’ve discussed, a remortgage is just a new mortgage at the end of your term and there are lots of reasons as to why someone may choose to do this.
You may still be wondering what types of mortgage would be available to someone looking to remortgage. We have listed the most popular below.
A fixed-rate mortgage is exactly what it says on the tin. Your mortgage will be fixed at a set rate, for a particular length of time during your mortgage. Typically we find that the most common chosen lengths for a fixed period tend to be between 2-5 years. It is much less common for someone to go any higher.
The reason why people choose this type of mortgage is that it will keep your mortgage payments the same for the chosen years, regardless of any interest-rate increases or decreases (though as it stands in 2022, it is very unlikely that decreases will occur).
No doubt during your mortgage, circumstances will change. You might be earning more money or have started a family and want a bigger home. On the flip side, you may be looking to downsize and reduce monthly outgoings.
If you’re tied into a long deal, your only way out is to pay an early repayment charge (ERC) to exit the mortgage during its fixed period, which isn’t ideal for most homeowners.
This is why 2-5 year fixed rates tend to be the most popular option, as it allows for consistency but also allows for you to have the freedom to grow or change your plans if your circumstances are no longer the same as when you first moved into your home.
A tracker mortgage is a flexible type of mortgage that has an interest-rate that will follow the Bank of England base rate. The rate won’t match the base rate exactly, instead sitting at a percentage just above the base rate.
Let’s say your mortgage is on a 2% interest-rate and the base rate is sitting at 0.75%. You’ll likely be paying 2.75% on interest. A tracker mortgage will move in accordance with the base rate, however. So, if the base rate rose to 1%, you would be paying 3% on interest.
Your tracker mortgage will be fixed for a set period of time, then transitioning into your lenders standard variable rate once that period ends. Your lender has the freedom to modify your interest-rate as they see fit, whether the base rate moves or not. This can be avoided by remortgaging after the tracker period ends.
The positives of utilising this mortgage type is that you’ll be paying less interest when the base rate is low, they’re fairly transparent so they don’t regularly change and there are sometimes caps of which your interest rate won’t go past, if the base rate goes high enough.
Alternatively, the downsides to these are that you could face an early repayment charge if you decide it isn’t for you, when the base rate goes up, your monthly payments will increase, and your tracker may possibly have a “collar”, meaning that even if the base rate drops, your tracker can only go so low.
When your term ends, you may have the option of remortgaging onto a discounted variable rate mortgage. As touched upon when talking about tracker mortgages, lenders will have their own standard variable rate. This is what anyone with a fixed period on their mortgage will move onto, once that period ends.
The discounted variable rate will be fixed in at a percentage below the lenders standard variable rate. So let’s say the SVR is sitting at 3.99% and your mortgage was agreed to be fixed in at 1% below that, you would have a 2.99% interest-rate. Similarly to tracker, if the lender increases or decreases their SVR, your interest rate follows.
This means that if the SVR goes up to 4.99%, you would be on a 3.99% interest rate. Alternatively, if that rate went down to 2.99%, you would be left with a 1.99% interest rate. These changes to your mortgage remain that way until something changes again, or your fixed period ends.
The positives of this are that you will be at a lower rate than the lenders SVR, you may have even lower interest rates if the lender moves their SVR in accordance with a Bank of England change, and if you ever needed to pay them, you will typically face lower early repayment charges than other mortgage types.
Whilst most of the time a remortgage will be smooth sailing, being mostly dependent on what you’re looking to do and the equity sitting in your property, there are situations that are a little more complex and as such, require a bit more care from your mortgage advisor.
During the course of your mortgage, you may have developed some credit problems, resulting in defaults and CCJs (which stay on your file for 6 years, unless you appeal and successfully have them removed). Obtaining a remortgage with bad credit makes it more difficult to obtain a remortgage normal and in some cases, you may not be able to remortgage at all.
This isn’t always the case though, and it very much depends on who is applying for the mortgage and what their circumstances are. If you have a good repayment history on your mortgage, then a lender may be willing to trust you with a remortgage. The longer ago those problems were also works in your favour.
For those who can still remortgage, you may be left with limited options. Generally, staying with the lender you already qualified for would be most beneficial. Speaking to a mortgage broker is your best choice, to see what options you might have.
Even if a remortgage isn’t possible, a trusted mortgage advisor will be able to advise you on how best to work on your credit file, in preparation of when a remortgage becomes possible for you.
Inversely to having equity in your property, negative equity occurs when the value of your home drops below your remaining mortgage balance. This is very unlikely to occur, unless a major economic crisis sees a property market crash.
An example of how this would work, is if your home was worth £100,000 and you have a £90,000 mortgage. You’ve got £85,000 left to pay, but suddenly your home value plummets to £75,000.
Once on a 90% loan-to-value, you’re now on a 113% loan-to-value. Anything above 100% is considered to be negative equity. As mentioned above this would take a huge economic crisis and there is no quick fix for this.
Your choices are limited to; waiting for your properties value to increase, staying where you are (if you’re not looking to move), or overpaying your mortgage, as this will reduce the amount quicker. You could also renovate, though this risks putting you in more debt and it may be more helpful to use spare funds to pay off your mortgage balance instead.
Whether it be through marriage, friendship or something else, you may have previously taken out a mortgage jointly with someone. Later down the line, be it with animosity or a mutual agreement, you may no longer wish to be on the same mortgage as your co-borrower.
Your and said co-borrower may agree that they are to move out and you are to carry on the monthly payments. Sounds simple, right? Unfortunately, it doesn’t work that way. See if the lender has to chase for payments, your co-borrower is still liable, as they are still on the mortgage agreement.
Further to this, if you fail to keep up your payments, it’s not just your credit score that is harmed. Likewise, if they become quite poor at handling their credit, you are also affected. In either case, it can harm the others chances of getting a mortgage in the future.
The way this is solved, is by remortgaging to remove their name from the original mortgage. Whilst you may have been able to afford your mortgage before jointly, you will have to pass a lenders affordability checks to prove that you can keep up your monthly repayments without the other party.
You also have to bear in mind that your co-borrower, who has just as much right to the property as you, has to agree to let you keep the property. It is also likely that they will want any investment they made into the property back. This may mean remortgaging for more than is currently left on the balance, in order to pay their investment back to them.
A mortgage can be quite complicated to work with because of these two factors. If you are not be able to afford the mortgage by yourself, you may have the option of bringing in another applicant for another joint mortgage. It is best to seek mortgage advice when faced with circumstances like these.
Whilst remortgaging is very popular, it is not the only route that you can take. There are some related, lesser-known mortgage types that you could have access to, depending on your personal situation, that may be a viable alternative to taking out a remortgage.
Whilst a remortgage involves taking out a new mortgage for one of the many reasons above, with a different lender, a product transfer is the act of moving from your existing mortgage deal to a new one, with the same lender.
This type of mortgage may become an option if you are on or heading onto your lenders standard variable rate. If you’re content with the remaining amount on your mortgage balance and would prefer to be on a fixed-rate instead, this would be a product transfer.
These tend to be quite simple mortgage processes, due to the fact that there is no need for a formal valuation. Though affordability checks may be needed, this isn’t always the case, meaning everything can be potentially finalised quicker than a remortgage. This, along with the lower cost of the process, can make them a popular choice to homeowners.
By now you’re no doubt very familiar with how equity works, but there is more yet to learn. If you are over the age of 55, you may be able to look at your options for equity release. Though similar in name, this is different to remortgaging to release equity.
An equity release will most likely be in the form of a lifetime mortgage.
Once you have reached the end of your term (or even if there are some payments outstanding), you may be able to release your equity with a lifetime mortgage. This is where you borrow money secured against our home, whilst retaining property ownership.
Depending, you may be able to “ring-fence” a portion of the properties value. Many will use this as an inheritance for your family. You will have to pay interest on what is owed, though a common choice is to simply let the interest build up in the property.
When the borrower who took out the mortgage dies or moves into long-term care, the home is then sold, with the funds from the sale being used to pay off the mortgage balance. Your beneficiaries will receive any money that is spare after the sale.
Your estate may also have the right to pay off the mortgage without selling the property, if they can do so. On the other hand, if the sale doesn’t cover the balance, they may need to make up the rest themselves.
To counter this, the majority of lifetime mortgages have a no-negative-equity guarantee, wherein no matter how high the debt rises, you or your beneficiaries will never have to pay more than the value of the property.
Lifetime mortgages are a very specialist mortgage type, so you will definitely need to take mortgage advice and speak to an experienced mortgage advisor before going down this route.
If you are looking at your options for taking out a remortgage or have any questions regarding the information listed above, please feel free to get in touch.
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