How Does Remortgaging Work?

How Does Remortgaging Work

If you are wondering how to remortgage your house, you have come to the right place. Before remortgaging in any instance, you should be fully aware of the processes entailed, including information on how much remortgaging your property may cost you and what it is you need to consider before you go ahead and do so. You should also consider any other worthwhile alternatives such as second mortgages which may be a viable alternative for example when looking to refurbish a property (click here for more information).

When is it a good idea to switch and when is it not?

In order to make it clearer to you whether it is the best idea for you to switch right now, we will look at some examples. In the examples provided it will highlight how the size and the remaining term of the outstanding mortgage can affect whether or not it really is worth it in your current situation.

Example number ones like this. The cost of switching is £500. This is greater than the saving which is at £228, therefore there is no point in remortgaging.

In the second example, the cost stays at £500 but the saving on interest payments is over £1,000. In this case, it is clear that switching mortgages will save you money.

If you do change your mortgage before the conclusion of the deal, you may be expected to pay a fee known as an ‘early repayment fee’. Remember to always check associated fees and cost with any deal you go for.

Check the costs

Before you take the plunge to remortgage, you should be very conscious of checking all the costs associated with it. In some cases, lenders may offer you a fee-free deal in order to tempt you, however, you will still have legal, valuation and administration costs to cough up.

You can use the Annual Percentage Rate of Charge (APRC) as a guideline to help you when comparing deals. This is a way of calculating the interest rates which incorporate some fee associated with mortgages in the calculation.

What may look like a winning deal may in fact, turn out to be a deal which ends up losing you money if you do not do your research and your sums correctly.

Reducing your loan-to-value to get a better rate

Each and every mortgage has a limit as to how much you can actually borrow when it is compared with the current value of the property you hold. This will be shown as a loan-to-value. 

When it comes to remortgaging, the lower the loan-to-value you need, the more deals you may find available to you. You may even be able to get cheaper mortgage deals.

To calculate your loan-to-value, you first divide the outstanding mortgage amount by your property’s current value. Then you simply multiply the result by 100 and put a percentage sign on the end.

An example of this is:

The mortgage outstanding is £150,000

Your lender has estimated that your property’s current value is £200,000

If you divide 150,000 by 200,000 you get 0.75.

Last you will times 0.75 by 100. So 0.7.5 x 100 = 75. This means that your loan-to-value is 75%.

What reasons are there for remortgaging?

There are plenty of reasons why you might remortgage, with some of the most common reasons including trying to get onto a more favourable and affordable mortgage, consolidating debt and unlocking additional equity in your property to convert it into multiple living units.

However, should conversion of a property be your choice you should be mindful that you will also need to stay on the right side of building regulations and will need to pass various assessments, much like you will do if you seek to sell the property (RJ Acoustics). These are therefore additional costs to be considered and accounted for.

To get a better interest rate

When you take out a new mortgage, you will normally receive an introductory deal. This may mean that you get a low fixed or discounted rate or a low tracker rate for the initial years of your mortgage. These kinds of deals usually see you out around 2 to 5 years depending on the lender.

Once this deal ends, it will be the case that you will be moved on the lenders standard variable, this is may to be higher than other rates you are going to find elsewhere.

Therefore, it may be wise to start looking at switching when your introductory period is coming to a close and see if a new mortgage deal will end up saving you money.

For more flexibility 

Some people like the idea of remortaging for the flexibly of the deal they are likely to receive.

You may want to switch to an offset or a current account mortgage where you will be using your savings to reduce the amount of interest that you pay permanently or temporarily. You also have the option to draw your savings back if you need them at any point.

To consolidate debt

It is not uncommon for people to find themselves in debt. You may be tempted to borrow some extra money and use it to pay off your other debts which are outstanding.

However, it is advisable that instead of actively adding debt to your mortgage that you try and prioritise and clear your debts separately if possible.

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