What does re-mortgaging mean?

In simple terms, re-mortgaging refers to switching from your existing mortgage to a new one, in an attempt to lower the monthly installments. People may also re-mortgage their property to borrow more money against it. Mortgage services usually provide enticing rates initially, to attract borrowers. However, a few years into the tenure, mortgage services tend to put borrowers on a Standard Variable Rate (SVR).

How does remortgaging work?

Mortgage payments can take up a lot of money each month, as they are your most expensive monthly installments. If you get a better offer than your existing mortgage deal, re-mortgaging can serve as the ideal switch, saving you a lot of money on interest. Now there two ways to go about it – re-mortgaging through your existing mortgage service or shopping around for deals. Some services may give you a preferential rate on your deal for loyalty. However, there’s still no harm in looking for other options, as you may find something better. ‘

Mortgage providers will take into account your property’s value, your earnings, and expenditures, and the amount left to pay on your existing mortgage. Once they evaluate this, they will offer you a new deal to pay off the old one and replace it with the new, better one.

When should you go for this option?

There are a plethora of reasons to consider this option. We’ve outlined a few of them for your reference here:

  1. Your ongoing mortgage deal is about to come to an end: Remortgage to a comparatively cheaper plan, before being put on SVR by your lender. SVR kicks in towards the end of your mortgage and is typically higher than the interest you were previously.
  2. You want a better deal, with cheaper interest rates: If you get an offer with a cheaper interest rate, it is a good idea to switch by re-mortgaging. However, do keep in mind that some mortgage providers charge an early re-payment fee. Weigh the outcomes of both the scenarios before switching, as they should count towards your ultimate goal of saving money.
  3. Your property has increased in value by a significant amount: If your property’s value has shot up in the recent past, there’s a fair chance your Loan to Value will decrease. As you get more equity in your property, you’ll be eligible for much more favorable mortgage offers.
  4. You’re worried that interest rates might sore: When Bank of England base rates rise, it might affect your mortgage deal. However, if your mortgage provider has increased their interest rate for new customers, then you have nothing to worry about. The agreed-upon rate with your mortgage provider for your deal will most likely stay intact, whatsoever.
  5. Your current mortgage provider doesn’t allow you to overpay: Suppose you’ve recently been given a raise or have somehow arranged on sufficient money. You might want to overpay towards your mortgage just to ease the burden a little. However, your mortgage provider allows only a small amount to no overpayment at all.

If there are no repayment charges involved, then re-mortgaging may allow you to switch to a better deal, with a smaller loan amount and a perhaps cheaper interest.

When is this option not ideal?

Sometimes re-mortgaging may not be your wisest option. Below are some scenarios where it’s best to stick to your ongoing deal:

  1. Your mortgage amount is small: If you only have a small amount left to pay towards your mortgage, switching may not be a good idea. Remember that there is a fee involved in taking up a mortgage, if you switch now, you might end up paying more rather than saving.
  2. Your lender will levy a large repayment fee: Don’t be penny-wise, pound-foolish with this one. If you switch to a better deal but your mortgage provider charges a hefty amount for repaying early, is it even worth it?
  3. Your property’s value has declined: If your property’s value has declined and your equity has decreased owing to a higher LTV, you may not get good deals. So it is better to stick to your existing offer and make timely repayments.
  4. Your financial circumstances have changed: A change in your financial circumstances such as loss of a job or a switch to self-employment can reflect badly on your profile. Mortgage providers will check your sources of income and may not favor your application if that’s the case. So if employment feels topsy-turvy, it is best to stick with what you have.

How much can you re-mortgage for?

The amount you can borrow via re-mortgaging varies from person to person. For instance, your income, ongoing debt, affordability, etc., everything is taken into consideration. Lenders are obligated to check your ability to pay to ensure that you’re not overwhelming yourself with debt.

Another key factor involved in re-mortgaging is Loan-to-Value (LTV), which is a ratio derived by comparing the money you wish to borrow and your property’s value. It helps in determining your equity in your home. You should ideally maintain a low LTV percentage.

How do I calculate my LTV?

Below is the formula to calculate LTV, along with a mathematical representation:

  1. Divide the amount left to pay on your existing mortgage, by your property’s current value.
  2. Multiply the result achieved in step 1, by 100.

Example

  • Your outstanding amount for the existing mortgage is £150,000.
  • Your lender evaluates your property at approximately £200,000.
  • 150,000 divided by 200,000 = 0.75.
  • 0.75 x 100 = 75 – so your loan-to-value is 75%.

Is now a good time to re-mortgage?

Bank of England’s recent base-rate reduction from 0.25% to 0.1% has been the steepest fall in its 326-year-old history. While savers may not benefit from this drastic fall, it is music to the ears of buyers. They can now enjoy lower interest rates on loans, should their lender follow suit.

If you’re on a fixed-rate mortgage deal, it won’t make a lot of difference. However, people on a tracker mortgage are likely to benefit from the descending rates. So it is a perfect opportunity to move to a cheaper deal for all borrowers.

Recently, however, lenders are refraining from applicants seeking higher LTV deals – which means people with lower equity in their homes, may face difficulties in getting a good offer. This measure will help mortgage providers, re-assess the risks in the property market, and figure out the best they can offer while exercising the ongoing restrictions.

Having said that, however, the mortgage market is more competitive now, than ever. As per recent studies, the average interest on two-year tracker deals has plummeted from 2.03% to 1.86%, over the past few weeks. The interest on average two-year fixed mortgage deals has dropped from 2.43% to 2.19%. While the average interest on a five-year fixed rate has gone down to 2.48% from the former 2.73%.

Different mortgage providers offer different deals, so it is likely that your deal is too. So long as you weigh the pros and cons of switching to a new plan, re-mortgaging in these times is a good opportunity to find more favorable mortgage options.