Remortgaging, also known as refinancing in the USA, is the process of replacing your existing mortgage with a new one on the same property. People often remortgage their home to secure better interest rates, reduce monthly payments, or access additional funds for significant expenses. Whether you’re switching to a new mortgage deal or trying to lower your lender’s standard variable rate (SVR), understanding the remortgage process is crucial to make informed decisions.

This guide explores What is remortgage and the pros and cons of remortgaging, delving into the reasons why homeowners consider this option and situations when it might not be the best idea. We’ll also highlight key factors like early repayment charges, exit fees, and when it’s worth pursuing an agreement in principle for a better deal.

What is Remortgage?

A lot of people may think that wanting to remortgage in a negative situation. It can save you a lot of money depending on your reasons for opting in. With a mortgage likely being the most expensive debt you commit to, it’s important to make sure you’re paying the best rates and reduce your personal risk.

Manchester Solicitors Firm Gorvins said: It is important to ensure re-mortgaging is cost-effective for your personal situation, for example, if the value of your outstanding mortgage is small, it is quite likely that the costs of re-mortgaging will cancel out any potential savings on offer.

At times, remortgaging can save people thousands of dollars each year but not for everyone. Everyone has a different offer and situation and making sure it benefits your mortgage is key. Here are the pros and cons of remortgaging.

Pros and Cons of Remortgaging

Pros

Current deal is about to end

Most attractive mortgage rates, such as fixed or tracker rates, are temporary, lasting two to five years. Once these rates expire, you typically move to the lender’s standard variable rate svr, which is often higher. By planning ahead—starting around 14 weeks before your rate expires—you can apply for your new mortgage and secure better terms to maintain or reduce your mortgage repayments

Receiving a better rate

If you are tied into a deal that isn’t suiting your needs or has extra fees such as early repayment charges or exits fees considering better deals and what lenders elsewhere can offer you is a good idea. By the time, you make the transfer fees or any other fees you may not be saving too much, really consider all the cost before committing to remortgage.

The value of your home has increased

how much is my house worth

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Checking the maths is correct is essential, but if the value of your home has increased then you might be entitled to be put in a lower loan-to-value band, and eligible for lower rates.

Read more: How much spend preparing house for sale

Your interest rate could potentially increase

Be wary of changing anything, if it’s the bank’s base rate that is predicted to increase this could affect your mortgage payments directly. However, if it’s the rates that are changing for new customers it doesn’t mean that yours will be going up.

You want to overpay

If you have inherited money or have a dramatic pay increase, and you want to pay extra, some deals don’t include the option to overpay or include unreasonable charges to do so. Remortgaging will allow you to reduce your loan size and potentially get a cheaper rate. But again, compare this to the fees you may have to incur by leaving.

You would like to borrow more

If your current lender has refused to loan you additional funds or isn’t offering acceptable terms, remortgaging might enable you to raise the funds at a cheaper rate. Most lenders require evidence of how the additional funds will be used, so be prepared to justify your reasons in your mortgage application.

Getting a flexible mortgage

Everyone will have a different reason for it, such as job change, going back to education or traveling, but there are flexible mortgages for those who want to take payment holidays. It’s never a free service though, so make sure you need the time off before committing to a flexible rate.

Read more: Mortgage loan types

Cons

High Fees or Small Mortgage Amount

Averagely, if your loan falls below £50,000 if may not be worth switching. The fees to remortgage can be high and it means you lose out on the reason for switching. Some lenders won’t even accept mortgages under £25,000. The lower you mortgage the worst the fees become that you’ll need to pay.

Your early repayment charge is large

Sometimes, it’s better to just wait until your incentive period is over, there would be no gain and high charges for those who want to pay early to get out. A better idea would be to ask your current lender if you can change deal and do some sort of product transfer. It’s not likely that you’ll receive the best current deal, but you might find its better than your current situation.

Circumstances have changed

Changing financial situations, such as unemployment or unexpected bills, may make remortgaging challenging. Since 2014, stricter lending rules mean lenders require robust evidence of financial stability. Staying with your existing lender might be your only option if your financial profile doesn’t meet new criteria.

The value of your home has dropped

Originally you might have got a great offer on your home and mortgage, paying 10% up front and owing 90% of the home’s value. If the value of your home has dropped and you owe a bigger portion back, you are a victim of evaporating equity. Sometimes making the repayments isn’t enough and you have negative equity where the value of the debt is more than the home. The best option is to make overpayments and avoid paying extra fees whenever you can, sadly it may just be a case of waiting for the value in your area to increase again.

You have little equity

Usually, if you borrowed more than 90% then you will struggle to find a better deal, currently there is a spike in mortgages at 95% so looking around wouldn’t hurt, but it’s likely that a better offer isn’t available.

Credit problems

credit problems

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The Financial Conduct Authority must verify that mortgages are affordable and that you can cope with the payment even if there is an increase in rates. If you have had credit problems since your mortgage then you may struggle to get a remortgaging option. The FCA wants to know a lot more about your outgoings and current situation. It only takes one missed payment of a bill of any sort to create a flag in your file.

So in case, your credit score is acting as a barrier, there’s always help you can get from any of the best credit repair companies for 2018 to help you improve your score quickly and efficiently (so it doesn’t come back to haunt you).

Your current deal has a good rate

This is a great time to appreciate your current deal and keep things as they are. Likely the deal won’t last forever and you’ll need to research remortgaging options for a better deal in the future, just don’t lose out on a current good deal too early.

Read more: 7 reasons why non-traditional mortgage financing might be for you

Bottom line

Remortgaging can be an excellent financial decision for many homeowners, offering the opportunity to lower interest rates, access additional funds, or enjoy greater flexibility. However, it isn’t suitable for everyone, especially if fees, changes in equity, or financial difficulties diminish its benefits.

Before proceeding, consider your current deal, potential costs like exit fees, and your eligibility for better terms. By carefully evaluating your financial situation and planning for future stability, you can determine whether to stay with your current mortgage or seek new opportunities by remortgaging your home.

What Is Remortgage? Pros and Cons of Remortgaging You Should Know was last modified: December 17th, 2024 by Richard Meadow
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