What is remortgaging?
A remortgage is the term given to the process of taking out a new mortgage on the home you already own – either to replace your existing mortgage or to borrow additional money against your property.
It is important to note that when you remortgage; the new mortgage is still secured against the same property.
- Lenders will normally give you an introductory deal when you take out a new mortgage e.g. a low tracker rate or low fixed or discounted rate.
- Introductory deals tend to tie you in for between 2 – 5 years and tend to switch over to the lenders standard variable rate (SVR) when the deal has finished. The SVR is normally higher than other rates you can get from other lenders.
- To find a better rate and reduce the interest rate on your mortgage
- Existing deal coming to an end
- To fix your monthly payments and protect against possible future interest rate rises
- Raising money to carry out home improvements or buy a new property
- Consolidate your debts
How does remortgaging (borrowing against equity) work
There are two ways your equity can increase:
- Appreciation of the value of your home
- Your home value stays the same but you pay down your mortgage with a repayment mortgage (not an interest only mortgage)
When you remortgage you are basically taking out a new mortgage that is larger than your existing mortgage.
Therefore, your overall mortgage and monthly payments are likely to increase; however, you will have a lump sum of money that can be utilised elsewhere e.g. home improvements or deposit for another property etc.
How much can I remortgage my house for?
(This examples below are working on the assumption of capital raising)
The amount you can borrow when remortgaging is determined by certain information related to your personal circumstances and the property; including:
- Your properties value
- The amount of equity remaining in the property
- Your credit rating/history
- Employment details
All lenders have a limit on how much you can borrow when compared with the current value of the property.
This is shown as a percentage and is known as the ‘loan-to-value’.
Most lenders tend to offer a maximum of 95% LTV remortgage. The lower the loan-to-value you need, the more and cheaper deals that are likely to be available to you.
How to calculate your loan-to-value
- Divide your outstanding mortgage amount by your property’s current value.
- Multiply the result by 100.
- Original value of your home is £200,000
- Your outstanding mortgage with your existing lender is £180,000
- You currently have £20,000 equity
- Value of your home increases to £240,000
- You now have £60,000 equity
- You remortgage to a new lender for £240,000 and pay off your existing mortgage (£180,000)
- From the £60,000 equity; you have put down a 15% deposit (£36,000) on the new mortgage. This means you have released £24,000 equity.
- This £24,000 is how remortgaging allows you to cash-in on this increase in value without having to move property.
- As you put down a 15% deposit (£36,000) (Yes you still need to pay a deposit). This means your new mortgage now starts from £204,000.
The cost of remortgaging
It is important that you consider all the costs involved (and not just the interest rate) before you remortgage.
- Review the cost of your current mortgage repayments and compare what the cost of your new repayments may be; to ensure you’re comfortable with the potentially larger monthly outgoings.
- Calculate the total cost of a bigger mortgage and see how much more interest you will pay over the lifetime of the mortgage.
- Lenders tend to charge an early repayment fee which is designed to recoup some of the interest that your current lender will be losing out on by you leaving your deal early. The early repayment fee is usually calculated as a percentage of the outstanding amount left on your mortgage.
- In order to remortgage your property; a valuation will have to take place. Most lenders will charge you for this!
- The price of mortgages go up and down due to interest rates. A new mortgage at a time when interest rates are low could mean lower mortgage costs however, if interest rates were to rise; getting a new mortgage could increase your monthly mortgage payments. Timing is everything!
- Legal work will need to be carried out when you remortgage. You will have to pay a conveyancer to transfer your mortgage to another lender and they will also arrange for the outstanding mortgage to be paid back to your current lender. NB. Some lenders will cover this fee for you
- Lenders tend to charge an arrangement fee (also known as a product fee) when setting up a new mortgage. You can usually pay the arrangement fee in one of two ways:
- 1. Upfront
- 2. By adding it to your mortgage
Fees such as the arrangement fee usually work in conjunction with the interest rate. E.g. High rates tend to have lower fees and low rates tend to have higher fees. Ensure you have done the maths to see which option is best.
PC Case Study: On a recent remortgage we did, the property was valued at £300,000. We believed the property was worth more so found comparables and sent them onto our lender. These comparables were taken into account by the lender and the property was revalued at £320,000. This increased valuation allowed us to take out a greater amount of equity from the property in question.
NB. It is important to remember that your property may be repossessed if you do not keep up repayments on your mortgage.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.