An Introduction To Remortgaging
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Many people are now looking for a refinance mortgage (remortgage), that is changing from their current mortgage to one with different terms. Some homeowners are looking to reduce the cost of their monthly repayments by extending the time over which the payments are made or switching to a lender with a lower interest rate. Others are looking to raise money for home improvements or other purposes. This short guide aims to give some basic jargon-free information about remortgaging.
Remortgaging
It’s becoming increasingly common for people to shop around to save money, and this also applies to their mortgages. As interest rates and your finances change, it’s worth looking at what else is on offer as you could potentially save a lot of money on your mortgage. It’s important to do your sums though- switching to a more competitive lender could mean an overall saving due to lower interest rates, but it’s important to check the small print of your current agreement as some lenders will charge an exit fee and also an early repayment fee if you want to take your business elsewhere. There can also be other fees to take into account, including paying the next lender an application fee, valuation fee plus any legal fees. If you employ their services, mortgage broker fees can also apply but some brokers will not charge you a fee as they earn commission.
There may also be other restrictions imposed by the lender if you are receiving special rates as part of a deal. These factors will have to be taken into account when working out if you are better off with another deal.
Shopping Around
If you are going to refinance and you’re shopping around for a new repayment mortgage deal, it’s important to consider how long you have left on your current one and look at how much a new deal would be over the same period. For example if you have 15 years left before your repayments are finished, then compare your current deal with a new 15-year one. If you don’t do this, you may think a new lender’s product is better than it really is. Remember to add any costs or penalties you might incur from your current lender to the costs of setting up with a new one. If the cost of leaving your current deal is £500, and the set-up costs of the new one are £500, total cost is £1000. If you calculate that by switching you will pay £100 less per month, then the cost of switching will be covered in 10 months, after which you’ll be £100 better off each month. It is also worth noting that not all mortgages are available to people who are remortgaging, so you need to check if the one you are interested in will be available to you.
If you decide to change to a new lender, it may be worthwile asking your current one if they can improve on what they currently give you. If you decide to accept what they offer, you would then avoid having to pay penalties to them and also avoid application, legal and valuation fees for a new mortgage.
If you can find yourself a cheaper deal than your current one, keeping your monthly repayments at the present amount would mean that you could finish your repayments earlier, and potentially save money by paying a lot less interest to the lender.
Disclaimer-
This guide does not constitute financial advice. Anyone seeking financial advice should seek appropriate professional advice.
Some Useful Tips
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Here are a few tips for people who are considering a refinance mortgage-- Make sure that the new mortgage you choose is available to homeowners who are remortgaging as not all of them are.
- Most people should choose a Repayment Mortgage over an Interest-Only one as there’s no risk of shortfall then.
- Check if the lender charges interest daily, this is better as the amount you owe becomes less every time you make a payment, meaning you pay less interest than with a lender who calculates interest annually. Annually means that 12 months worth of payments have to be made before the amount you owe is reduced.
- Using a Mortgage Broker can save you a lot of hassle and open up deals that wouldn’t be available to you as an individual. Opt for a ‘whole of market’ broker, they may be free or charge you for the service so check first. Do still check some other deals yourself though, as some lenders don’t offer their deals through brokers.
- Your lender may offer to add buildings insurance and Mortgage Payment Protection Insurance to your monthly payments. If you shop around and buy them separately you are likely to save money even though some lenders charge a fee if you decline their insurance.
- If money is particularly tight, a fixed rate deal means that during the fixed rate period you won’t have any nasty surprise increases in your monthly payment if interest rates should rise. Don’t forget though that when the fixed rate period is over, your payments could increase significantly if interest rates have risen.
Disclaimer-
This guide does not constitute financial advice. Anyone seeking financial advice should seek appropriate professional advice.
Which Deal Should You Choose?
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There are many different types of refinance mortgage available, and it pays to carefully consider exactly what type you need to find the right one for your present situation.Mortgage Brokers
It can save a lot of time and hassle if you use a mortgage broker to find the best deal for you. They may also be able to obtain mortgage deals that are not available to individual customers. The type to choose is a ‘whole of market’ broker, as others may offer a limited selection of products and not include the most competitive deals. Some may charge a fee, however others are free and make their money from commission.
Interest-Only Vs. Repayment
Despite the large number of different mortgages, they can be divided into two types- Interest-Only and Repayment. In the case of interest-only products, it’s possible to find yourself with a shortfall if the investment aspect of your mortgage fails to perform well. This means that you would be responsible for finding the extra money needed to make up the difference between the value of the investment and the amount you owe. With repayment types you will not risk having a shortfall as some of the money you pay each month goes towards the interest, and some towards repaying what you borrowed.
Types of Mortgage
Some of the different types available are:
Standard Variable Rate- Interest rate varies as it’s linked to the Bank of England’s interest rate. Drops in Bank of England interest rate may not all be passed on to you however.
Tracker- Follows changes in Bank of England interest rate exactly, but some types may have a minimum interest rate below which they won’t drop (known as a ‘collar’).
Fixed- The interest rate is fixed for a set period, from a few years up to 25 years. If rates have increased during your fixed period, your payments might increase greatly when the fixed period is over unless the fixed rate period covers the whole length of the mortgage. Also, if the Bank of England interest rate falls your payments will not.
There are many other types of deals and it shouldn’t be a problem finding one to suit your circumstances. For more information see Loan Mortgage Financing.
Disclaimer-
This guide does not constitute financial advice. Anyone seeking financial advice should seek appropriate professional advice.
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