How Does a Remortgage Work? The Process Explained

A remortgage involves replacing your current mortgage with a new one while remaining in the same property. This process differs from obtaining a second mortgage or purchasing a new home. The primary goal is to secure new financing terms for a property you already own.

Understanding Why People Remortgage

Homeowners remortgage for various financial objectives. One common reason is to secure a lower interest rate or more favorable mortgage terms, such as transitioning from a variable rate to a fixed rate, which can lead to reduced monthly payments.

Another motivation for remortgaging is to release equity from the property. This involves borrowing more against the home’s value than the outstanding mortgage balance, providing a lump sum for other financial needs. Funds acquired through equity release are often used for home improvements or consolidating existing higher-interest debts into a single, lower-interest mortgage payment.

Homeowners may also remortgage to change their mortgage type, for instance, converting an interest-only mortgage to a repayment mortgage, or to shorten the loan term to pay off the mortgage faster. Remortgaging often occurs when a current mortgage deal, such as a fixed-rate period, is nearing its end. Without action, the mortgage reverts to the lender’s higher standard variable rate (SVR).

Preparing Your Application

Homeowners must gather specific information before applying for a remortgage. This includes personal documentation like identification and proof of address.

Lenders will request income verification, such as pay stubs for employed individuals or tax returns for those who are self-employed. Documentation of existing debt obligations, including credit card statements and loan agreements, is necessary. Information on savings and investments may also be requested.

Property details are also important. This includes recent mortgage statements showing the outstanding balance and current interest rate, as well as details of any existing charges or liens on the property. Lenders will also consider your credit history, as a strong credit score is important for securing favorable terms. Lenders evaluate factors such as your loan-to-value (LTV) ratio, which compares the loan amount to the property’s value, and your debt-to-income (DTI) ratio, which measures your monthly debt payments against your gross monthly income.

Navigating the Remortgage Process

Once all necessary information and documents are prepared, the remortgage process begins with the formal submission of your application. This can often be done through an online portal, directly with a lender, or with the assistance of a mortgage broker.

After submission, the new lender typically arranges a property valuation to assess the home’s current market value. This valuation is essential for the lender to determine the loan-to-value (LTV) ratio and ensure the property provides sufficient security for the new mortgage.

Following the valuation, the application moves into the underwriting phase, where the lender conducts a thorough assessment. This includes detailed affordability checks, reviewing income and expenses, and comprehensive credit checks to evaluate financial reliability. If the application meets the lender’s criteria, a mortgage offer is issued, outlining the terms and conditions of the new loan. It is important to carefully review all details within this offer.

Legal work, known as conveyancing, is a necessary step in the remortgage process, even without a property sale. Solicitors or conveyancers handle the legal transfer of the mortgage from the old lender to the new one, ensuring all legal charges are correctly registered. They manage the paperwork, review property titles, and coordinate the completion date. The final stage is completion, where the new mortgage funds are released, and the outstanding balance of the old mortgage is paid off. After completion, new statements and direct debit arrangements for the new mortgage payments are put in place.

Understanding Remortgage Costs

Several fees and charges can arise during a remortgage, impacting the overall financial benefit. Lenders may charge an arrangement or product fee for setting up the new mortgage, which can range from approximately £1,000 to £2,000, though some lenders do not impose this fee. This fee can sometimes be added to the loan amount, but this means paying interest on it over the mortgage term.

A valuation fee is typically incurred for the property assessment conducted by the new lender, usually ranging from £250 to £1,500, depending on the property’s size and value. Many lenders, however, offer free valuations as an incentive to remortgage with them. Legal or conveyancing fees are charged by solicitors for their services, often around £300 to £454, though some lenders may cover these costs if you use their appointed legal services.

A significant cost to consider is the early repayment charge (ERC) from your current lender if you end your existing mortgage deal before its term expires. ERCs typically range from 1% to 5% of the remaining loan balance and can amount to thousands of pounds. This percentage may decrease the longer you have been in the deal.

Additionally, some lenders may impose a small exit fee, around £50 to £300, for closing the old mortgage account. If a mortgage broker is used, their fees can range from a flat rate of £300 to £600 or up to 2% of the mortgage value. When evaluating a remortgage, it is important to weigh these potential costs against the projected savings from a lower interest rate or other financial benefits to determine if the move is financially advantageous.