Can You Remortgage Early and Is It Worth It?

Remortgaging involves replacing an existing mortgage with a new one, typically using the same property as collateral. This process allows homeowners to adjust the terms of their home loan. While many homeowners consider remortgaging as their current mortgage deal nears its end, “early” remortgaging refers to undertaking this process before the conclusion of an existing mortgage term, often a fixed-rate or introductory period. The primary goal of remortgaging is to secure a more favorable interest rate or to access home equity.

Eligibility and Restrictions for Early Remortgaging

Homeowners considering an early remortgage must first understand the specific terms of their current mortgage agreement. Many mortgage products, especially those with fixed interest rates, include an early repayment charge. This fee is levied by lenders to offset the loss of anticipated interest income when a mortgage is paid off or refinanced ahead of schedule.

Early repayment charges are calculated as a percentage of the outstanding mortgage balance, often ranging from 1% to 5%. For instance, a 2% charge on a $250,000 outstanding balance would amount to $5,000. These conditions are detailed in the original loan documents.

Beyond the existing mortgage’s terms, eligibility for a new mortgage involves several lender criteria. Lenders assess a borrower’s financial standing, including their credit score, which is a significant factor in loan approval and interest rate determination. For conventional loans, a minimum credit score of 620 is generally required, though a higher score, such as 760 or above, can secure more favorable rates. Government-backed loans, like FHA or VA loans, may have lower minimum credit score requirements, sometimes as low as 580.

Lenders also evaluate the loan-to-value (LTV) ratio, which compares the mortgage amount to the property’s appraised value. Many conventional lenders require at least 20% equity in the home for a remortgage. Additionally, a borrower’s debt-to-income (DTI) ratio is reviewed to ensure they can manage new monthly payments. A strong credit score might offer some flexibility with a higher DTI, but a DTI ratio of 36% or less is preferred.

Costs Associated with Early Remortgaging

Remortgaging early involves various fees and charges that can impact the overall financial benefit. The most prominent cost is the early repayment charge, if applicable, which can range from 1% to 5% of the outstanding mortgage balance. Homeowners must consider if the potential savings from a new mortgage outweigh this upfront expense.

Other common fees include arrangement or product fees. These are charged by the new lender for processing the loan and typically amount to 0.5% to 1% of the total loan amount. For example, on a $300,000 loan, this could range from $1,500 to $3,000. These fees may sometimes be rolled into the new mortgage, increasing the loan amount and potentially the interest paid over time.

A valuation or appraisal fee is also required to assess the property’s current market value for the new lender. This fee typically ranges from $300 to $600 for a single-family home. This valuation ensures the loan amount aligns with the property’s worth, protecting the lender’s investment. Legal fees are incurred for the legal work involved in transferring the mortgage lien from the old lender to the new one. These costs vary and are part of the broader closing costs associated with the new loan.

Overall closing costs for a remortgage can range from 2% to 5% of the new loan amount. These encompass various charges such as title service fees, recording fees, and credit report fees. Accounting for all these expenses is necessary when evaluating the financial viability of an early remortgage.

Steps to Remortgage Before Your Term Ends

Once a homeowner has assessed their eligibility and understood the potential costs, the remortgaging process can begin.

Research and Application

The first step involves researching new mortgage deals, which can be done through mortgage brokers or by contacting lenders directly. It is advisable to start this research approximately six months before the current mortgage deal ends to allow ample time for comparison and application. This proactive approach helps avoid defaulting to a potentially higher standard variable rate from the current lender.

After selecting a suitable deal, the next step is submitting a formal mortgage application to the chosen lender. This requires providing extensive financial documentation, including recent pay stubs, W-2 forms for the past two years, federal tax returns, and bank statements for all financial accounts. Lenders use this information to verify income, assets, and financial stability. A prompt response to any requests for additional information from the lender can help keep the application moving forward.

Valuation and Legal Process

Following the application, the new lender will arrange for a property valuation or appraisal. This step confirms the home’s market value, allowing the lender to approve the loan amount. Simultaneously, legal professionals handle the necessary paperwork, property searches, and the transfer of the mortgage title.

Offer and Completion

Upon successful completion of the valuation and legal checks, the borrower will receive a formal mortgage offer from the new lender. It is important to review this offer carefully to ensure all terms and conditions are as expected. The final stage is the completion of the remortgage, where funds are transferred, the old mortgage is paid off, and the new mortgage officially begins. The entire process typically takes between four to eight weeks from application to completion. Borrowers may opt for a rate lock, which freezes the interest rate for a specific duration, usually 30 to 60 days, protecting against market fluctuations.

Key Considerations for Early Remortgaging

Deciding whether to remortgage early requires careful evaluation of individual financial circumstances and market conditions.

Market Conditions

One factor is the current interest rate environment. If prevailing interest rates have significantly dropped since the original mortgage was secured, remortgaging could lead to substantial savings on monthly payments and overall interest costs. Conversely, if current rates are higher, an early remortgage might not be advantageous unless other financial goals are prioritized.

Personal Financial Changes

Changes in personal financial circumstances can also prompt an early remortgage. For example, an increase in income might allow a homeowner to shorten their loan term, paying off the mortgage faster and reducing total interest paid. Alternatively, a need to reduce monthly outgoings or to release equity from the home for other purposes, such as debt consolidation or home improvements, could make early remortgaging a viable option.

Cost-Benefit Analysis

The impact of early repayment charges on potential savings must be thoroughly analyzed. It is important to calculate whether the long-term savings from a lower interest rate or different mortgage features will outweigh the cost of these charges. If the penalty negates the savings, waiting until the current fixed term concludes might be a more financially sound decision.

Future Goals

Consideration should also be given to desired mortgage features. Homeowners might wish to switch from an adjustable-rate mortgage to a fixed-rate mortgage for payment stability, especially if interest rates are expected to rise. The long-term financial goals of the homeowner, including how long they plan to remain in the property, are also important. If a homeowner anticipates selling the home within a few years, the costs of remortgaging might not be recouped, making the process less beneficial. Calculating the break-even point—the time it takes for savings to offset the remortgaging costs—is a useful tool in this assessment.