Is Remortgaging a Good Idea for You?

Remortgaging involves taking out a new mortgage on a property you already own, replacing an existing one. The decision to remortgage is significant, impacting long-term financial commitments. This article explains the practical aspects and procedural steps involved in remortgaging.

What Remortgaging Entails

Remortgaging replaces your current mortgage with a new one, which can be from the same lender or a different financial institution. This action differs from simply borrowing more money on your existing mortgage, as it involves establishing an entirely new mortgage agreement. Homeowners consider remortgaging for several reasons. A common scenario is when an existing fixed-rate mortgage deal is nearing its end. Without remortgaging, the loan might revert to the lender’s standard variable rate (SVR), which is often higher and can lead to increased monthly payments. Another reason for remortgaging can be to consolidate existing debts by borrowing a larger sum against the home’s equity to pay off other higher-interest loans. Additionally, some homeowners remortgage to fund significant home improvements, leveraging their property’s equity to finance renovations that could add value to their home.

Information Needed for Remortgaging Eligibility

Lenders assess your financial standing and property details to determine remortgaging eligibility. Your credit history and score are primary considerations. Lenders examine your payment history, outstanding debt levels, and overall creditworthiness. A strong credit score indicates a lower risk to lenders and can lead to more favorable loan terms.

The Loan-to-Value (LTV) ratio is another factor. This ratio compares the outstanding mortgage balance to the property’s current market value. For instance, if your home is valued at $300,000 and your remaining mortgage is $150,000, your LTV would be 50%. A lower LTV ratio, below 80%, is seen as less risky by lenders and can result in better interest rates and product offerings.

Lenders also assess your income and employment stability to ensure you have a consistent ability to repay the new loan. They require documentation such as recent pay stubs, W-2 forms from the past two years, and sometimes tax returns, especially for self-employed individuals. Employment verification involves direct contact with your employer or through third-party verification services to confirm your employment status, job title, and income. Lenders prefer a stable employment history, looking for at least two years of consistent work.

A new property valuation is required during the remortgaging process. This valuation determines the current market value of your home, which directly impacts the LTV ratio and the loan amount a new lender is willing to offer. This valuation is primarily for the lender’s security, ensuring the property adequately secures the loan. Finally, you must have detailed information about your current mortgage, including the outstanding balance, the remaining term, and any early repayment charges (ERCs) or exit fees. Understanding these existing mortgage terms is important for calculating the total cost of remortgaging and determining if it is financially advantageous.

Costs Associated with Remortgaging

Remortgaging involves several financial outlays. An Early Repayment Charge (ERC) may be levied by your current lender if you pay off your existing mortgage before the agreed-upon term ends. These charges range from 1% to 5% of the outstanding loan amount, with the percentage decreasing the longer you have been in the deal.

New lenders impose arrangement fees, also known as product or completion fees, to set up the new mortgage. These fees range from $500 to $1,500, or a percentage (0.5% to 1%) of the loan amount. While these fees can be added to the mortgage loan, paying them upfront can save money over the life of the loan as interest will not accrue on the fee amount.

Valuation fees cover the cost for the new lender to assess your property’s current market value. This fee ranges from $250 to $1,500, depending on the property’s size and value. Some lenders may offer free valuations as an incentive.

Legal or conveyancing fees are incurred for the solicitor or conveyancer who handles the legal work involved in transferring the mortgage from one lender to another. These fees average around $300, but some remortgage deals may include free legal services.

If you use a mortgage broker, you may pay broker fees, which range from a flat fee, such as $300 to $600, or up to 1% of the mortgage value. Some brokers receive commission directly from the lender, potentially reducing or eliminating the fee charged to the borrower.

Finally, a mortgage exit fee, also known as a deeds release fee or administration fee, may be charged by your current lender to cover the administrative costs of closing your mortgage account. This fee is smaller than an ERC, ranging from $50 to $300, and is separate from any early repayment charges.

The Remortgaging Application Process

The remortgaging application process begins with inquiry and research. Homeowners explore new mortgage deals through online comparison tools or by engaging a mortgage broker. This research helps identify lenders offering terms that align with personal financial goals.

Once a suitable deal is identified, the next step involves making a formal application to the chosen new lender. This stage requires submitting documents, including proof of identity (e.g., a driver’s license or passport), income verification (e.g., recent pay stubs and W-2 forms), and property details (e.g., address and current mortgage statements).

Following the application submission, the new lender arranges a property valuation to confirm its market value. Simultaneously, solicitors or conveyancers commence the legal work. This legal process includes checking the property title and preparing documents for the transfer of the mortgage from the old lender to the new one.

Upon successful completion of the valuation and legal checks, the new lender issues a formal mortgage offer. This document outlines all the terms and conditions of the new mortgage, including the interest rate, loan amount, and repayment schedule. Review of this offer is important before proceeding.

The final stage is completion, where the new mortgage funds are released. These funds repay the old mortgage. The new mortgage is then registered against the property.