Buying a home is the biggest purchase most people make. Most require a mortgage to do it and breathe a sigh of relief once that’s sorted.
But time flies and with Britain’s favourite mortgages being two and five-year fixed rates, many homeowners find their deal is ending and it’s time to remortgage sooner than they think.
At that point it is time to plunge back into a mortgage world that many of us know little about – and with interest rates rising it’s important to make sure you get remortgaging right and move to the best possible new fixed rate or other deal.
Our guide explains what you need to know about remortgaging, including whether to move bank or building societies, why using a broker makes sense, how to get your home revalued, why you might be in a better loan-to-value bracket, and thinking about how long to fix your mortgage for this time round.
Key purchase: Buying a home and servicing the mortgage is most peoples’ biggest financial commitment, so it is important to make sure you are always on the best possible deal
What is remortgaging?
When you climb onto the property ladder your mortgage becomes your biggest outgoing for years to come as you repay the loan over a set period of time – typically 30 years nowadays.
But most mortgages sold in Britain come with an initial low rate, fixed for perhaps two or five years, and then revert to a bank or building society’s more expensive standard variable rate.
So, while a borrower might sign up to a mortgage with a 30-year term, staying on the same deal and with the same lender for that entire period is usually a bad idea.
Just like with energy bills or broadband, the mortgage normally needs to be renewed when a fixed-term deal ends, in order to avoid the borrower falling on to a more expensive variable tariff.
This is what is know as remortgaging – taking out a new mortgage to replace your existing one on the same property.
Remortgaginng allows borrowers to shop around and find a cheaper interest rate, or a mortgage that better suits their circumstances – and it can allow them to borrow more against the value of their home, perhaps to fund an extension.
What is a mortgage standard variable rate?
The average standard variable rate, known as an SVR, is much more expensive than the typical two or five-year fixed mortgage rate.
Depending on how much equity a borrower has in their home and when they took out their current mortgage, it could be two or even three percentage points higher.
The advantage of an SVR is that there are usually few financial penalties if you need to pay off the mortgage early or move home before the term ends. Fixed rates, in contrast, tend to lock borrowers in with early repayment charges during the deal period.
Unless you think there is a good chance you will need to move home or clear your mortgage within the fixed or other special deal period, remortgaging to another fixed rate is usually the way to go.
Why should you remortgage?
How you increase equity in your home over time
If the value of your home rises with time, it also means your equity share in the property increases.
For example, if you purchased a property worth £200,000 with a mortgage of £160,000, and five years later, your property is worth £250,000, the value gain is all yours, and not the lender’s.
If your original mortgage agreement had been to pay off £160,000 over a 25-year period, you would have also reduced the mortgage amount down to about £134,000 after five years.
Taken together, this means that in the space of five years, your ownership stake in the property would have increased from just 20 per cent (£40,000) to 46.40 per cent (£116,000).
Remortgaging allows you to take advantage of this gain, by either enabling you access to better deals or allowing you to release some of your equity towards things like home improvements for example.
Remortgaging is the process of moving the mortgage on your existing property from one lender to another, or changing your home loan with your existing bank or building society.
The most obvious reason for doing this is to save yourself money and to avoid falling onto your lender’s higher SVR – where you would remain until you did remortgage.
Even if fixed mortgage rates are more expensive today than when you took out your existing fixed deal, it still almost always pays to remortgage instead of dropping on to the SVR.
Another incentive for remortgaging is the fact that over time a homeowner will build up equity within their property.
For example, when someone buys a home with a 10 per cent deposit and a 90 per cent mortgage, they have 10 per cent equity.
As they repay the mortgage, they build up greater equity within the property, whilst the percentage effectively owned by their mortgage lender reduces.
Once a borrower has moved from having 10 per cent equity in the home to 15 per cent, for example, this could open the borrower up to cheaper mortgage deals.
These levels of equity measure by the size of the mortgage vs the property’s value are known as loan-to-value. Lenders will have different rates at varying loan-to-value levels, ie 90 per cent loan-to-value, 75 per cent loan-to-value and 60 per cent loan-to-value.
Remortgaging can also help if you want to pay off a large chunk of your mortgage, perhaps because you have come into an inheritance or received a large bonus from work.
The majority of fixed-rate mortgage deals allow borrowers to make overpayments amounting to 10 per cent of the total outstanding amount each year without incurring early repayment charges. Some are more flexible whilst others may be more restrictive.
Early repayment charges typically range between 1 and 5 per cent of the total mortgage amount.
If you want to clear more than that, when your existing mortgage is up for renewal it is a good time to make a larger overpayment without risking charges.
Expensive: For most, remortgaging is a way to avoid paying more than you need to – for example of if you unknowingly drop on to your lender’s standard variable rate
Remortgaging to release money from your home
Remortgaging can also be a way to release money from your home. It is often used by those who have built up considerable equity from house price appreciation and making monthly repayments and want to use the cash to do something.
Remortgaging allows you to take advantage of this gain, enabling you to release some money for things such as home improvements, or paying off other more expensive debts.
This will increase your monthly payments and the amount of interest you pay over time. And, of course, it is only possible if you can afford the extra mortgage amount required based on your current incomings and outgoings.
David Hollingworth, associate director at mortgage broker L&C Mortgages says: ‘Keeping your mortgage under close review throughout its lifetime can slash the total cost of the borrowing.
‘There are thousands of deals on the market so it makes sense to shop around to get the best deal on what is often the biggest outgoing.’
Best mortgage rates and how to find them
Finding a mortgage can seem confusing due to the huge range of deals on offer.
This is Money has partnered with independent fee-free mortgage broker L&C, to help you find the right home loan.
Our mortgage calculator can let you filter deals to see which ones suit your home’s value and level of deposit.
You can also compare different mortgage fixed rate lengths, from two-year fixes, to five-year fixes and even ten-year fixes, with monthly and total costs shown.
Use the tool at the link below to compare the best deals, factoring in both fees and rates.
> Compare the best mortgage deals available now
When to remortgage
For homeowners approaching the end of their existing fixed deal, it can be vital to plan ahead and lock in a new mortgage offer at the earliest opportunity.
This is particularly true at the moment, when mortgage rates are rising and are forecast to continue going up as the Bank of England raises interest rates to combat high inflation.
Many borrowers don’t realise that they can often apply up to six months before their current deal ends to secure a new one and lock in the rate. This is because lender offers are typically valid for between three and six months.
Locking in a new offer ahead of your existing mortgage deal expiring will mean you can move seamlessly from one mortgage to another without ever falling onto the SVR.
One tip that brokers often give is to add arrangement fees to the mortgage, as they are then not paid until it is taken out. This means you can lock in a new fixed rate mortgage in advance at no cost and only pay fees if you take it out.
Knowing exactly when your current deal ends is vital, because leaving a fixed mortgage too early can result in early repayment charges.
It may not be as simple as being exactly two or five years from when the mortgage started.
Some lenders, such as Nationwide, will fix for a number of years from the start date of the mortgage – also known as the completion date.
However, many fixed rate deals are fixed to a certain date, so it might be that you find you have either more or less time than you initially thought you had left to run on your mortgage.
You’ll be able to find this date on your mortgage offer letter or by contacting your lender. A mortgage broker may also be able to advise you on this.
Pencil in the date: It is advisable to know when your current mortgage is up for renewal – and this might not be on exactly the same date that you started it
Should I stay with my current lender or switch?
Often it pays off to move bank or building society, as the one you are with may not offer the best or cheapest mortgage for you anymore.
It is worth getting the help of a mortgage broker to do this, as they can compare deals across the market and will know which ones would be right for you. They can also help you decide whether to fix your mortgage rate and how long for.
Mortgage brokers earn money through commission but some also charge clients fees, while others are fee-free. This is Money’s longstanding mortgage broker partner is London & Country, it offers a fee-free service. Find out more and compare mortgage rates with the This is Money mortgage service.
Sometimes it will make sense to stick with your current lender rather than remortgage to another lender. This is what is known as a product transfer in the mortgage world. You simply move from one mortgage product to another product with the same lender.
It may even be that your current lender is offering the best available deal. On top of that a product transfer also allows you to skip additional fees – you won’t typically have to pay for legal and valuation costs.
It can also be faster than a remortgage, which could be important if you have already slipped onto a standard variable rate.
A product transfer will typically take a matter of days whilst a remortgage can take weeks or even months to complete.
However, it’s always worth looking into remortgaging as the chances are you’ll find a better deal by shopping around.
A mortgage broker will help you understand the benefits of each option, and give you an overview of deals across the whole market, whereas your lender will only be able to offer you its own deals.
What do I need to have ready before I remortgage?
Waiting for a mortgage offer can be a lengthy experience as you go back and forth with the lender over questions and documents.
Having all your documentation ready in advance will save time and make the process less painful.
The documents you will need include your latest three months’ bank statements, as well as proof of identity (passport or drivers license) and proof of address (utility bill).
How to check your credit score for free
There are a number of ways to view your rating and history for free.
Experian and Equifax offer 30-day free trials of their service online, but you will need to remember to cancel before the end of the promotion to avoid subscription fees.
Checkmyfile also offers a free trial to check your reports with both Equifax and Callcredit.
Alternatively, you can request a snapshot excluding any score by requesting a statutory credit report online or by post at a cost of £2 from each agency.
Free credit report options can also be found by visiting Credit Karma and Clearscore.
If you are fully employed, you’ll need your last three months’ payslips and your latest P60. If you’re self-employed, you’ll need your last two to three years of tax returns.
You may not be required to provide all this information to the lender, but it is better to have too much than too little. The lender will confirm exactly what is required once the application is made.
In advance of remortgaging it would also be wise to check your credit file, making sure you have no errors or issues that might lead a lender to reject your application.
A credit report shows a list of a person’s credit accounts, such as bank accounts, credit cards, utilities and mortgages.
It will also display their repayment history, including late or missing payments.
When a person applies for a loan or mortgage, the lender will look at their credit report on top of their proof of income and bank statements.
They will carry out a credit check, often leaving a record on the person’s credit file which can in some cases be visible to other lenders. They will often also apply their own credit score to your application.
How to work out what your home is worth?
Mortgage lenders will do their own valuation before agreeing to lend you money, but before that it is also sensible to find out how much your home is worth.
You will need to submit an idea of your property’s value when you apply for the remortgage and it affects the loan-to-value and rate you pay. It doesn’t have to be too precise, the lender will check this via its own valuation.
You can find out quite a bit online by checking asking prices of homes for sale and the Land Registry Database of sold prices, Rightmove sold prices and Zoopla to get an indication of what a similar home in your area would cost. You could also contact estate agents to provide a free valuation.
Know your house price: People will tend to have an idea of what the local market prices look like, although their valuation will be checked by the mortgage lender
What are the costs involved in remortgaging?
Remortgaging can come with a number of added costs.
Firstly, some mortgage deals include an arrangement fee. These are fees lenders charge borrowers for setting up their mortgage, and they range from nothing at all to £2,000.
But as well as covering the lenders’ costs, they essentially act as a ‘top-up’ profit on mortgages with lower rates.
What is loan-to-value?
Loan-to-value is a measure of how much you are borrowing on a mortgage compared to a property’s value.
It is dependent on the size of deposit you can put down or the equity in your home.
Someone putting down a £10,000 deposit on a £100,000 home would need a £90,000 mortgage.
This is 90 per cent of the property’s value, so they would be borrowing at 90 per cent loan-to-value.
Similarly a homeowner whose property is worth £100,000 and has an outstanding mortgage of £90,000 could remortgage at 90 per cent loan-to-value.
Sometimes, the same lender will offer a number of products, for example, one with a fee and one without. The one with a fee will have a lower interest rate.
But it is important to calculate your mortgage costs with this up-front payment included, as the bigger fee could end up making you worse off.
You can choose to add the fee to the mortgage or pay it off immediately, but mortgage brokers typically advise you don’t pay the fee upfront, just in case the mortgage doesn’t end up going ahead.
Hollingworth says: ‘Remortgaging can save hundreds per month, but it’s important not to be drawn solely to the lowest interest rate.
‘Arrangement fees can make a serious dent in any savings, especially for those with smaller mortgages, so it makes sense to factor all costs in to find the best overall value for your individual circumstances.’
There may also be a non-refundable booking fee at the point of application – typically ranging between £100 and £250.
If you are using a mortgage broker, you may need to pay extra for their services. However, there are now a large number of free online mortgage brokers that mean you can avoid doing so.
Mortgage brokers are paid commission by the lender – this is typically about 0.35 per cent of the total mortgage value.
For those who choose to use a mortgage broker that also charges a fee, you can typically expect to pay a fixed fee of between £500 and £1,000.
In some cases brokers charge a percentage of the mortgage amount. That can mount up, especially if you have a large mortgage. For example, 1 per cent on a £500,000 mortgage would equate to a £5,000 fee.
Alternatively, you can use a fee-free broker. Find out about This is Money’s mortgage partner L&C’s service here.
Fees: If you are using a broker, you may need to pay for their services – but there are also plenty that do not charge customers
Valuation and legals
There could also be a valuation fee and some legal fees to take into account.
The mortgage valuation is only to assess that the property is something that fits within the lender’s lending criteria, and that the amount being paid represents market value.
A mortgage valuation fee can vary depending on the value of the property. It will typically cost between £100 and £400, but in many cases it will be offered for free as part of the mortgage deal. If a fee is included, you will need to pay this upfront.
Some basic legal work is also required to pay off the current mortgage, remove the original lender from the property title and replace it with the new lender.
However, in most instances the basic legal work will be included for free as part of the mortgage deal, or some cashback will be made available to cover costs.
The free service is very basic, so if any additional work is required, such as adding or removing a partner from the mortgage, then you may be required to pay extra.
What are the affordability checks for a remortgage?
When it comes to remortgaging, the affordability checks are just the same as when you take out a mortgage in the first place.
Borrowers must undergo an affordability test, including proving they could pay more each month of interest rates were to rise. This is known as the ‘stress’ rate or test.
Currently, they must prove they could still afford their mortgage repayments if these were to increase to 3 per cent above their lender’s standard variable rate.
A lender’s affordability assessment will review your net income, your outgoings and monthly expenditure as well as the basic living costs of your household.
This could mean you end up being able to borrow less than the maximum income multiple depending on your other outgoings.
Affordability tests will vary from one lender to another, as will their eligibility criteria.
Lenders will each have a different approach to individual circumstances, whether it is the type of income they can accept or their approach to lending on a specific property type.
Going to the wrong lender could result in the application failing, even though another lender would be more flexible.
This is why mortgage brokers can be worth their weight in gold. It is their job to not only find you the cheapest deal, but also to match you with a lender that won’t end up rejecting your application.
Since 2014, banks have had a limit on the number of mortgages they can offer where someone is borrowing more than 4.5 times their salary.
Higher or lower: By shortening or lengthening the mortgage term you alter your monthly repayments. This could save you money in the short term but cost you more in the long run
Should you change your mortgage term?
The mortgage term is the number of years you agree to repay your mortgage for – which used to commonly be 25 years but on new mortgages is now more often 30 years.
By lengthening the term of a mortgage, a borrower spreads their repayments over a longer period of time and therefore reduces the monthly costs.
However, whilst taking out a longer mortgage term will reduce the monthly costs, it will ultimately mean paying interest for a longer period of time and therefore paying more in the long run.
For example, someone with a £200,000 mortgage paying 2.5 per cent interest over 20 years would face monthly repayments of £1,060, paying a total of £254,379 over the lifespan of the mortgage.
Conversely, someone with a £200,000 mortgage paying the same interest rate over a 40-year term would face monthly repayments of £660. However, they would pay £316,647 over the lifespan of the mortgage: £62,268 more than on a 20 year term.
While their interest rate would likely change during this time if they remortgaged or fell on to their lender’s standard variable rate, the principle remains the same.
Hollingworth adds: ‘Remortgaging to get the best rate can help put you in the best position to ensure you repay the mortgage more quickly, either by reducing the term or by making regular overpayments.’
Should you ever pay early repayment charges to remortgage sooner?
Most fixed-rate deals come with early repayment charges, which often range between one and five per cent of the outstanding mortgage amount.
In some cases the amount reduces as the mortgage deal gets closer to finishing.
For example whilst in the first year of a five year mortgage deal you may be slammed with a 5 per cent charge, however, if you are in your final year, you may only be subjected to a 1 per cent charge.
Whether or not it is financially prudent to absorb an early repayment charge to take advantage of current rates depends on your circumstances and you will need to do the numbers carefully.
Expert advice: Using a mortgage broker can help avoid application shocks, as they will know the rules and requirements of different lenders
Should you go it alone or use a mortgage broker?
Applying for a mortgage can feel a little overwhelming, particularly given all the jargon and deals available.
Every mortgage lender has their own criteria which you may or may not be suitable for – and for every lender you go to direct, you will have to go through another lengthy set of checks.
Dealing with a broker means that you should only have to tackle the checks once and they will then compare what they know about you to all the deals on the market.
On top of affordability and debt there are other factors that could cause you to be rejected. For example, if you’ve just started a new job, some lenders will reject those still on probation, so it’s important to check this prior to submitting an application.
Those currently on a visa in the UK need to also check whether their lender only accepts applicants with indefinite leave to remain.
It may also be that the property you are trying to buy is a type of construction they won’t lend on.
Some lenders are nervous about lending on former council flats, for example, or those which are made from non-standard construction materials.
Mortgage brokers will be aware of different lenders’ rules and requirements. They will also be able to tell you exactly how much you can borrow and interpret the impact of any blotches on your credit file.
But most importantly, they will help you find the cheapest deal possible for your set of circumstances and match you to a lender that – hopefully – won’t end up rejecting your application.
This is Money’s mortgage partner L&C has an online mortgage application tool, where borrowers can start the process in their own time and get an idea of what they could borrow and the rate they would pay. You can save your progress and come back to it later and then speak to one of L&C’s advisers when it suits you.
Switching between fixed and variable rates
Borrowers will pay a premium for fixed rates, but variable rates leave you at the mercy of lenders or the Bank of England
Another reason to remortgage may be to switch from a variable rate mortgage to a fixed one, or vice versa.
Variable rate mortgages include trackers, ‘discount’ rates and also standard variable rates, and monthly payments on them can go up or down.
While most borrowers prefer the certainty of fixed monthly payments, around a quarter of UK mortgages are on variable deals.
The cheapest fixed rates deals are typically a little more expensive than variable and tracker deals due to the added certainty and security they bring.
Trackers follow the Bank of England’s base rate minus a certain percentage, while discount rates are linked to the lender’s standard variable rate.
There are essentially two reasons to switch to a variable rate when a fixed rate comes to an end.
First, you need the flexibility. Variable rates usually have no fees or limits on paying off the mortgage early or moving, whereas fixed ones do.
The second reason to take a variable mortgage is that you believe interest rates will go down, which would make your monthly payments lower.
When interest rates are rising, those on variable mortgages might consider switching on to a fixed deal to protect themselves from rising payments for a certain period.