Remortgaging can be an effective way to save money on your monthly mortgage repayments, but it can be hard to work out whether or not it is actually worth it in the long run. Remortgaging is essentially switching your current mortgage to a new provider, usually at a lower interest rate.
Alternatively, if your existing lender launches competitive new mortgage deals, you could stay with them and just switch deals with the same lender. This also means you don't have to go through the tricky process of being accepted for a new mortgage with a new lender. For most of us, a mortgage is the biggest debt we'll ever have, so if you can re-mortgage to a cheaper deal you could save thousands each year.
What are the costs of remortgaging?
If you're looking to save money by remortgaging then it's important to offset it against the costs of the process.
- Early repayment charges (ERC's),
- Booking fees,
- Conveyancing fees,
- Survey fees,
- Mortgage product fees.
So you need to assess whether or not the savings you get by switching to a new mortgage with lower interest rates are greater than the costs of remortgaging.
There are many different mortgage types but the most common are fixed rate mortgages, variable rate mortgages, standard variable rate mortgages (SVR) or tracker mortgages.
Find out what they mean here.
Raising property worth and reducing your loan-to-value ratio
Mortgage deals are based on the LTV ratio. If you put down a £50,000 deposit on a property worth £200,000, your LTV is 75%, because your deposit is 25% of the property's value.
The deal you get depends on the amount of equity you have in the property which is used to calculate your LTV ratio. Essentially, the more of your own cash you can put in, the less you need to borrow from the bank and the more likely you are to get a good deal.
It should be your holy grail to gradually get the LTV ratio down, because then you qualify for cheaper deals and save money on interest repayments. As you pay off your mortgage, you'll gradually have more equity in your property and qualify for a cheaper deal. You also gain greater equity if the price of your property goes up from the price you paid for it.
Overpaying your mortgage can help you do this. Normally you can overpay up to 10% of the outstanding loan each year. Be careful though because there are severe penalties for overpaying too much.
As your equity increases, you can qualify for a cheaper mortgage deal and this is when re-mortgaging is a good idea. Use this mortgage calculator to check how much interest you pay and see the difference that repaying your mortgage over 20 years, rather than 25, saves you in interest.
When you should re-mortgage
Your current deal is about to end and you'll be automatically reverted to your lenders' standard variable rate which is typically higher. Start looking four months before your current deal ends.
You now have more equity in your property, so a lower LTV ratio, so you could qualify for cheaper deals that charge less interest.
If the property value has gone up a lot, you could now be in a lower LTV category and qualify for cheaper deals.
If you think the Bank of England mortgage rate will rise quickly and you'll pay more. This won't affect fixed mortgages for the product length but will impact those on variable rate mortgages. The more you owe, the bigger the impact.
You are earning more, or have inherited money, and want to pay down your mortgage but your current deal won't allow you to repay much. You still need to do the sums to work out if exit fees negate the benefits.
When you shouldn't re-mortgage
If you're in the early stages of a deal you may have to pay early repayment charges, which can be 2%-5% of your outstanding loan.
Your mortgage debt is really small. If this is the case, taking into account fees and the fact that any changes in interest rates are less significant you may be better off staying put.
If you become unemployed, self-employed or on a reduced income, you're unlikely to get a better deal re-mortgaging elsewhere.
Your property value has dropped. This means you LTV ratio may have gone up and you have little equity, making it unlikely you'll be accepted for a better deal elsewhere.
You've had credit problems since taking out your last mortgage.
You're already on a great rate.