What Does Remortgage Mean and How Does It Work?
Unpack the concept of remortgaging. Understand its definition, why homeowners consider it, and the practical steps involved.
Remortgaging involves adjusting the terms of an existing mortgage on a property already owned. This financial activity allows individuals to optimize their housing costs or access their home’s value for other purposes.
Understanding Remortgaging
Remortgaging is the process of replacing an existing mortgage with a new one, typically using the same property as security. This new mortgage can be obtained from the current lender or a different financial institution. When a homeowner remortgages, the funds from the new mortgage are used to pay off the outstanding balance of the old mortgage. This essentially transfers the loan obligation from one set of terms or lender to another.
The process differs from obtaining an initial mortgage because it applies to a property already owned and financed. While the underlying asset remains the same, the loan’s conditions, such as the interest rate or repayment period, can change.
Common Reasons for Remortgaging
Homeowners choose to remortgage to secure a lower interest rate or a more favorable mortgage product. Many mortgage deals have introductory periods, such as fixed rates, which eventually revert to a standard variable rate (SVR) that can be higher. By remortgaging, borrowers can seek a new competitive rate to reduce their monthly payments.
Another motivation is to release equity from the property. As a mortgage is paid down and property values increase, homeowners build equity, which is the portion of the home they own outright. Remortgaging for a higher loan amount than the existing balance allows access to this equity as cash, which can be used for purposes like home improvements or other expenditures.
Debt consolidation is a reason many homeowners remortgage. This involves combining higher-interest debts, such as credit card balances or personal loans, into the mortgage. By doing so, individuals may benefit from a lower interest rate and a single, more manageable monthly payment, though the debt is then secured against the home and repaid over a longer term.
Homeowners may remortgage to change the terms of their loan. This could involve shortening the mortgage term to pay off the debt faster or extending it to reduce monthly payments, providing greater financial flexibility. An improved financial situation, such as a higher income or an enhanced credit score, can also prompt a remortgage to qualify for more attractive rates and terms.
The Remortgaging Process
The remortgaging process begins with homeowners researching and comparing available deals from various lenders. Gathering necessary financial documents, such as proof of income, identification, and details of the current mortgage, is a preparatory step. Understanding the terms of the existing mortgage, including any potential early repayment charges, is necessary before proceeding.
Once a suitable lender and mortgage product are identified, the homeowner submits an application. This application includes personal and financial information that the new lender uses to assess eligibility and affordability. Following the application, the lender will arrange for a valuation of the property to determine its current market value. This valuation helps the lender decide on the loan amount and interest rate.
Legal work, known as conveyancing, is involved in the remortgaging process. A solicitor or conveyancer handles the legal aspects, which include reviewing the new mortgage terms, updating the property’s title deeds, and registering the new mortgage with the appropriate land registry. Some lenders may offer free legal services as an incentive for remortgaging with them.
After the lender completes their assessments, they issue a mortgage offer outlining the terms of the new loan. Upon acceptance, the process moves to completion, where the new mortgage funds are disbursed to pay off the old mortgage. The new mortgage replaces the old one. The entire remortgaging process can take between four to eight weeks to complete, though it is best to start exploring options three to six months before an existing mortgage deal expires.
Costs Associated with Remortgaging
Lenders charge an arrangement fee, also known as a product fee, for setting up the new mortgage. This fee can be a flat amount, ranging from £500 to £2,000, or a percentage, between 0.5% and 1%, of the loan amount. While some lenders allow this fee to be added to the mortgage, doing so means paying interest on it over the loan’s term.
A valuation fee covers the assessment of the property’s market value by the new lender. These fees range from £250 to £1,500, depending on the property’s size and value. Many lenders offer free valuations as part of their remortgage packages to attract new customers.
Legal or conveyancing fees are incurred for the legal work involved in transferring the mortgage. These costs fall within a range of £300 to £1,000, but they can vary based on the complexity of the case. Similar to valuation fees, some lenders provide free legal services as an incentive.
An early repayment charge (ERC) may be imposed by the existing lender if the homeowner switches mortgages before the current deal’s term ends. This charge is calculated as a percentage of the outstanding mortgage balance, ranging from 1% to 5%. The percentage often decreases as the mortgage term progresses, but it can still amount to thousands of pounds.
If a mortgage broker is used, their fees can range from a flat rate of £300-£600 or up to 2% of the mortgage value. Minor disbursement costs, such as Land Registry fees, may also apply.