How does remortgaging work?

There are many reasons to want to remortgage.

One of the most common is to take some of the cash invested in your property to use for other purposes. Other people want to find a better lending deal; one that makes monthly outgoings more manageable or offers a more flexible arrangement for example.

Either way, understanding ‘how does remortgaging work?’ can help you to decide if it’s the best route for you.

What is ‘remortgaging’?

When you come to the end of a fixed-term deal on your existing mortgage or find that its structure no longer suits you, some lenders will find ways to continue your mortgage with new terms and rates applied.

However, remortgaging literally means starting the process again on your existing property. Either with a different lender or with the same lender under a differently structured arrangement.

What are the benefits of remortgaging?

You may have a lot of cash in your bricks and mortar! To free up that money to meet debts, pay for major purchases or make changes to your property, one option is to remortgage. You replace your existing mortgage with one that decreases your ‘deposit’ and increases your loan.

Alternatively, remortgaging can be the best way to find a more up to date or beneficial way of paying off the money you owe on your property. By ‘shopping around’ you could find a deal that reduces your monthly outgoings with a better rate of interest, or which enables you to lengthen the term of your loan, for example.

Also, there are times when existing mortgages prove too restrictive in terms of investing lump sums to pay them off quicker. You may want to remortgage so you can increase your equity, reducing your payments in amount or duration.

What do remortgaging providers look for?

Qualifying to remortgage your home is along similar lines to applying for your original mortgage. However, don’t assume that the criteria are exactly the same. It could be that lending terms are tighter now, compared to when you first bought your home, as part of a national campaign to help people manage debt better.

The sort of information lenders will review are your income, age and credit rating. They are looking for evidence that you can meet remortgage payments reliably and without causing financial hardship.

What should you look for?

It’s important to spend time comparing qualifying criteria, interest rates and the different terms and conditions offered by lenders.

Taking professional advice on remortgaging can help pin down an arrangement that best matches your financial status and goals. Incidentally, if you do seek help in choosing a remortgage product, it provides you with a degree of protection. If your new mortgage proves flawed in some way, you can complain to the Financial Ombudsman Service (FOS) about the advice you received.

When is remortgaging unwise?

Remortgaging is not suitable for everyone. Especially when you look at the question ‘How much does remortgaging cost?’.

There are often fees charged to progress your new mortgage deal. Check they don’t cancel out any savings you make on monthly payments, for example.

Also, consider whether your new mortgage eases your financial burden in the short term only. Could your mortgage payments rise steeply after an initial period, leaving you worse off than with your original mortgage?

Something called the Annual Percentage Rate of Charge (APRC) can help you to measure different products against each other, and your existing loan. It is a system of calculating interest rates for comparison purposes, that includes admin fees.

There is another important cost you need to use in your calculations too. Does your existing mortgage include an early settlement or exit fee? By paying off your loan sooner than expected to begin the new arrangement, you could face a substantial ‘penalty’ – as much as 2 to 5% of the outstanding amount.

How much can I remortgage my property for?

As mentioned above, the lending criteria depends on evidence of your ability to meet monthly mortgage payments for the full term of the loan period.

As a general rule of thumb when considering remortgaging you need to find your property’s current market price, and then calculate something known as ‘Loan to Value’.

For example, when you bought your home it was worth £100,000 and you borrowed £80,000, putting a £20,000 deposit down. Over the years, you have paid some of that back, and you now have a mortgage of £65,000.

However, your property has risen in value and is now worth £110,000.

Take your outstanding mortgage amount and divide it by the current value of your property, then times it by 100. Using the above example, this gives you a Loan to Value of 59% and shows that you have a considerable amount of cash invested in your property.

The lower this percentage is, the more likely it is that lenders will offer you a range of remortgage products with favourable interest rates. If your loan to value rate is high – such as 90% or more – you may find it difficult to find a lender willing to offer a new mortgage arrangement.

When to start

Give yourself time to do the research and find the right product for you – such as two or three months before your fixed term arrangement ends or before you need the equity from your property.