Remortgaging can lower your mortgage repayments, or release cash tied up in your property, but should you do it? The answer depends on a few things.
In this article, we explain what it means to remortgage, why you should do it, and when. We also cover a few situations where remortgaging might not make sense.
What does it mean to remortgage?
Remortgaging means switching your current mortgage deal to another mortgage deal, either with your existing lender or a different one.
Why should I remortgage?
For many people, the reason for remortgaging is simple: it’s all about saving money on mortgage repayments. A mortgage is often your largest monthly expense, and if you shop around (like you would for a new broadband or mobile phone contract), you can make major savings.
But cheaper monthly payments isn’t the only reason to remortgage. Here are a few other examples:
- You want to switch from an interest-only to a repayment mortgage. An interest-only mortgage is where you pay off the interest on the mortgage each month, but not the mortgage itself. This means, at the end of the term, you’ll need to pay back the full amount you borrowed from the lender.
One alternative is to switch to a repayment mortgage, which lets you pay off the interest and the loan. This means you’d be chipping away at the actual amount you’ve borrowed each month, rather than just paying the interest.
- You want to make overpayments. If you’ve got more disposable income now than when you first took out your mortgage, you might want to start making overpayments. Those are extra payments, over and above your monthly mortgage payments.
Some lenders don’t allow overpayments. Others make it difficult, or they charge fees. If that sounds like your lender, you could remortgage to a new lender – one that lets you overpay.
- You want to release the equity in your property. If you’ve got your eye on an extension, dream kitchen, or loft conversion, remortgaging to release equity could be the way to fund it. “Unlocking equity” means borrowing more against the value of your property and pocketing the extra cash for home improvements. You can learn more about remortgaging to release equity here.
When should I remortgage?
Here are a couple of times when it might make perfect sense to remortgage:
- Your current mortgage deal is coming to an end
- Your home’s value has skyrocketed
Let’s dig into these in a little more detail.
Remortgaging when your current mortgage deal is coming to an end
Some of the most attractive fixed rate mortgage deals last for only a short time – usually two, three, or five years (although some do last longer). During that period, you pay the same amount each month and the interest rate stays the same.
But when that period comes to an end, your lender will probably shift you over to their standard variable rate (SVR). SVR is basically the lender’s out-of-contract rate, and it tends to be a lot more expensive than the rate you get in a deal. Ending up on an SVR can often mean paying up to double the interest rate that you were paying before.
But if you line up your remortgage with the end of your current deal, you can move onto a new and fixed rate deal (either with your existing lender or a different one), hassle free.
Remortgaging when your home’s value has skyrocketed
If your property value has gone up since you took out your mortgage (win!), you could find yourself with a lower loan to value (LTV).
LTV is the size of your mortgage compared to your property’s value. If your home is worth £250,000 and you have a £200,000 mortgage, your LTV is 80%. Imagine your home jumps in value by £15,000, and it’s now worth £265,000. You still have a £200,000 mortgage but the difference between the amount left on your mortgage and your property value has increased. Your LTV is now 75%.
Lenders think of LTVs in ‘bands’, offering lower mortgage interest rates if you’re in a lower band. 60% LTV is the best from a lender’s perspective, then 75%, then the bands go up in 5% chunks from there.
LTV isn’t the only thing that affects your interest rate of course – other things, like your credit score, can also affect the rate lenders offer you.
How often should I remortgage?
It depends on your situation.
If your current fixed rate deal is coming to an end, you should remortgage before the interest rate goes up. It’s also a good idea to keep a close eye on your LTV over time, to make sure you’re always on the best possible rate.
This could mean remortgaging several times in pursuit of a better deal as you edge closer to paying off the full amount — but there’s no magic number.
When shouldn’t I remortgage?
There will also be times when remortgaging just doesn’t make sense. These include:
When your remaining mortgage is too small
The smaller your mortgage, the more you’ll be affected by remortgage fees. If your remaining mortgage is less than £50,000, the cost of remortgaging will probably outweigh the savings you’d hope to make.
And once your mortgage is down to around £25,000, some lenders won’t consider you for a remortgage at all.
When your early repayment charges are high
Leaving a mortgage deal early can mean paying an early repayment charge (ERC), which is usually a percentage of the remaining mortgage. This might mean that remortgaging before your current deal expires simply doesn’t make financial sense.
For example: If you have a remaining mortgage of £150,000 and the ERC is 5%, you’d be charged £7,500 to exit the agreement. If the ERC is higher than the savings you stand to make by switching, it’s better to sit tight — at least until the ERC clause expires.
When your financial situation has changed
If your financial circumstances have changed since agreeing your current mortgage deal, you may find it trickier to get a new mortgage deal.
For instance, if you’ve become self-employed, stopped working, or were furloughed during the COVID-19 pandemic, you could fall outside a lender’s affordability criteria. This doesn’t always mean you can’t remortgage, but the choice of deals may be limited at the moment.
Do I need to remortgage?
You don’t need to remortgage. If you’re happy with your deal, you can choose to stick with your current lender for the duration of your mortgage agreement.
But if you’re about to slip onto your lender’s standard variable rate, you could save a lot of money by remortgaging.
Use our mortgage calculator and remortgage calculator to see how much you could save.