Remortgaging is cancelling your existing mortgage and getting a new one, often (though not always) with a different lender. It can save you a lot of money when the right deal is selected at the right time, but many people are confused about the factors involved in this decision and not fully aware of all options. In this article we will explain the benefits, the costs and other considerations.
Remortgaging Benefits and Motivations
Although by far the most common underlying reason for remortgaging is to save money, there can be a number of other motivations:
- Reducing interest rate and monthly repayment. A few years into your mortgage deal you may realize that the rate you are paying is higher than rates available to new borrowers on the market. This can happen not only when interest rates decline in the broad economy, but also due to mortgage lenders offering lower rates in the beginning (to attract new clients) and switching to their standard, higher rate after an introductory period. When remortgaging you basically become a “new” client again – the kind of client who often gets better treatment.
- Releasing equity. When the market value of your property increases (either due to general market uptrend or after you’ve made improvements to the property), the only way to turn this paper profit to actual cash, besides selling the property, is remortgaging.
- Switching to a fixed rate. The typical situation when you may want to switch from a variable interest rate to fixed one is when interest rates drop or are very low (like now) and you want to lock in a lower rate for a longer time.
- Changing term. If your income has increased, you may want to reduce the mortgage term, in order to be able to repay it sooner. On the contrary, extending the term makes the monthly repayment lower and more manageable.
- Getting a more flexible deal. The new mortgage may allow you to overpay, underpay or take a break in repaying, or may charge lower fees for these things than your existing mortgage.
- Getting a better deal when your credit score has improved. Many people have less than perfect credit profile when first getting a mortgage. As your income and credit score improve and you become a more trustworthy client to potential lenders, you get access to better deals.
While you can save an enormous amount of money when remortgaging and getting a lower interest rate, there are also costs. You will have to pay two sets of fees – setup fees for the new mortgage, as well as exit fees for the existing mortgage.
Exit fees are typically very high in the first few years of a mortgage (during the lock-in period, usually 1-5 years) and then decline significantly. Therefore many people choose to remortgage shortly after the lock-in period ends.
Besides fees payable directly to the (old and new) mortgage lender, other expenses must also be taken into consideration, such as legal and valuation fees. Furthermore, if you are a busy person and value your time highly, don’t forget to also think about the time and attention it will require – sometimes saving a few hundred is not worth the hassle.
Best Time to Remortgage
When the lock-in period of your existing mortgage has expired, spend some time thinking about your situation and deals available on the market in light of the above listed benefits. Check the potential costs to assess whether the switch would be worth it.
One final piece of advice is to not try too hard predicting future direction of interest rates, property prices and the mortgage market – even the professionals and central bankers don’t know the future.