How to navigate the world of remortgaging

It’s coming up to that time: your mortgage term is almost up, and you need to start thinking about mortgaging. But how can you be sure you’re going to get a good deal?

The mortgage world can feel daunting, especially in times of economic uncertainty.

Below, we demystify the remortgaging process, explaining in plain English how to be more informed and prepared when tackling your remortgage deal. We’ll also go through all the steps you need to give yourself the best chance of finding a great deal.

What is remortgaging?

At the most basic level, remortgaging is switching your mortgage for an improved or different interest rate with another lender, usually on the property you already own, but there are exceptions to this.

There are a few main reasons that you will be considering remortgaging, these include:

• Coming to the end of your current product term
• Moving home
• Remortgaging early to save money in the long run
• To borrow more against your current property

All of these are valid reasons to remortgage. Let’s look at them in a little more depth.

When should you remortgage?

Choosing the right time to remortgage is almost as important as the new rate you’ll be able to get. This is because when it comes to remortgaging, when you do it will dictate (to some extent) the rates you’ll be able to get. And many times, you won’t get to choose the perfect time.

Moving home: Not technically remortgaging, you can either “port” your mortgage over to the new property or get a new mortgage which is known as a Home Mover mortgage.

Your mortgage doesn’t fit your current circumstances: If your financial circumstances have changed, such as becoming self-employed or being out of work, it may affect your ability to secure a new mortgage. If possible, wait until your situation stabilises to improve your chances of getting a favourable deal.

Conversely, if you’ve received a pay rise or inheritance, you might want to pay extra on your mortgage. However, your current deal may not allow for significant overpayments without charges or may limit them.

End of product term: The most common reason for remortgaging. A fixed term mortgage product will usually be 2, 3, or 5 years, at the end of this term you will need to go on to a new mortgage product. If you still haven’t chosen one by the time your product expires you will automatically get put on the Standard Variable Rate (SVR) of your current lender until you remortgage or conduct a product transfer.

How your equity affects your remortgage rate

The equity of a property is the difference between the amount that you still owe and the current value of the property. It is possible to be in negative or positive equity.

Let’s use some examples:

Negative equity: Your house was £200,000 when you bought it. It’s remortgaging time and you still have £180,000 to pay off. The house is valued at £160,000 meaning that the value of the property is less than your loan, this is negative equity. The problem with this is that you will have lost money on your property; the debt is larger than the assets value.

Positive equity: Your house was £200,000 when you bought it. It’s remortgaging time and you still have £180,000 to pay off. The house is valued at £260,000, meaning you have a positive equity of £80,000! If you are in positive equity it puts you in a much stronger position when negotiating your new mortgage deal. The difference between how much you owe, and the value of your property is known as the Loan-To-Value (LTV) rate.

Things that could affect your remortgage application

Unfortunately, you won’t be able to just select the rate you like from a lender and then be able to have that mortgage product. If only it were so simple!

Lenders are keen to protect their financial interests and so won’t accept everyone’s application for a mortgage. There are several aspects that affect your prospects with a lender. These are:

Loan to Value (LTV) rate: This is calculated by taking the difference between how much you owe and dividing it by how much the property is worth and then multiplying it by 100. This gives the figure as a percentage of the property value, analogous to the amount of deposit you have to put against the property.

The LTV ratio is the amount you have left to pay, relative to the property value, so to find this, you subtract the amount of equity from the property value as a percentage. As an example: you have £50,000 equity on a £200,000 property, a deposit of 25% so the LTV is 75%, which is the amount you owe.

The lower your LTV, the better. The lower your LTV, the more likely it is that you’ll get a favourable rate come remortgage time, because this means that the loan is less risky to the lender.

Credit history: One of the first things a lender will look at is your credit history. This gives them an indication of whether you spend within your means and how good you are when it comes to repaying your debts. They want to minimise the risk and ensure you are as safe a prospect as possible. After all, they are lending you a substantial amount of money!

If you have a poor credit score and/or history, you will not have as many remortgage options with a better interest rate, if any. The only way to improve your credit score is to create a record of regular repayments against your debt(s), which takes time if your credit score is low. It’s unfortunate, but if you have a low credit score, you’re going to have to work at it to get it higher.

If you are in a fixed term product currently, you know when your mortgage is going to be up for renewal. Knowing this gives you a deadline (of perhaps even years) for you to turn the ship of bad credit around.

Easier said than done! Creating as much evidence as possible that you are a safe pair of hands and will reliably be able to pay back the mortgage will literally pay off in the end.

Use a mortgage broker: Many brokers will have access to resources that won’t be available to you if you decide to do it on your own. They have professional relationships with many lenders and will be able to procure deals that won’t be available to you anywhere else. A broker also has the expertise to help find the deals for you, taking your specific circumstances and concentrating the search in areas they know will garner the best results. Contact our advisers for more information.

Your savings: Any amount of savings can be used to tip the balance of your LTV into a threshold where you may be able to enjoy significant savings. Even just a few hundred or thousand extra pounds could be used to tip you from a threshold where you were paying an interest rate of 4.5% of your mortgage down to 4%, for instance, which is a huge chunk over the long term.

What do you need to apply for a remortgage?

When the time comes to actually apply for your remortgage, you’re going to need to gather some paperwork. We have some examples below but it’s always best to ask a lender or your broker for a list of what they need to see, just as a precaution.

Proof of income: A lender will need to see three months’ worth of financial records, in the form of bank statements, your last three payslips, and if you’re self-employed, two or three years of financial records.

Your P60: This is a tax form that shows how much tax you’ve paid on your salary in that tax year. You will be issued with one every tax year by the employer of each job you have.

SA302 if self-employed: This is a copy of your self-assessment tax form if you are self-employed. If you know you are going through the process of remortgaging in the near future, it’s best to request this form from HMRC or your accountant as soon as you can; it may take a while to reach you.

Types of mortgage

Finding the best interest rate is important, but which type of mortgage should you choose?

There are a few options to consider and things to bear in mind before deciding which mortgage is right for your financial circumstances. We’ll go through the most common mortgage aspects you are likely to come across during the remortgaging process.

Fixed rate: These are by far the most common type of mortgage available. A fixed rate means that the interest rate on the repayments you’ll make will be the same for a fixed amount of time. A fixed-term mortgage usually lasts for a 2,3, or 5-year term. After the term ends, you will need to remortgage with a new interest rate.

There are several advantages to using a fixed rate. By having a set amount of time at a certain rate, you can plan and organise your finances yourself much easier, ensuring you’re ready for when the term ends and you have to go onto a new rate, which may be worse through no fault of your own. It also creates financial stability, enabling you to set up payments regularly, which will always be the same, for up to 10 years, giving you peace of mind.

Variable: If you’re open to a bit of vigilance and risk, then a variable rate mortgage can, and we stress, can, lead to huge savings. This is because the interest rate for your mortgage will typically track the Bank of England base rate.

This is a double-edged sword; at times of recession, interest rates usually fall, and at times of growth they tend to increase, and so too will the payments on your mortgage if you are on a variable rate.

When the economy is more or less stable, this can lead to massive savings because rather than being stuck to a rate for years you pay what the current rate is in real time.

Within the variable rate bracket are three options:

• Tracker: Your mortgage tracks a fixed economic indicator. Usually the interest rate set by the Bank of England.
• Discount mortgage: A discount on a standard variable rate (SVR) mortgage. The terms for these deals tend to be short, only 2 to 3 years.
• SVR mortgage: A mortgage using the rate set by the lender, these can save you a lot more than a tracker mortgage but also cost you more since the rate is set arbitrarily by the lender in line with market forces.

Offset: This is a type of mortgage where you offset the amount of the loan with a chunk of your savings. It’s probably your best bet of making the biggest saving but requires that you have a substantial amount of savings to make a difference.

How it works is you reduce the amount of your loan by the amount of cash you have in savings, say you have £40,000 in savings and a £200,000 mortgage, then the amount you’ll be paying interest on for your mortgage is £160,000.

You can still choose between a variable or fixed term but if you are able, an offset mortgage could net you huge savings in the long run.

Interest only: These mortgages are usually offered to landlords and enable you to pay only the interest accrued on the mortgage until the term runs out. The catch is that when the term ends, you have to pay the entire amount of the loan for the property. These types of mortgages are quite rare and, as with the others, you need to show a lender that you will be able to pay off the loan at the end of the term. Their rarity is mainly due to the risk involved in loaning out such a large sum of money and not having it paid back at all over the term of the mortgage. Interest only mortgages are, however, also available on a residential basis in particular circumstances.

Porting: If you’re moving home, your current mortgage might be portable. You’ll be able to find this out from your lender or most recent mortgage offer document; it means you can take your current deal and carry it over to the new property. There is no guarantee that the lender will accept the new property or allow you to keep the same rate, but if you have a good rate then it will be worth trying to keep it for as long as you can.

Where to find the best mortgage interest rates

When it comes time to actually choose your mortgage, how do you go about it? Ideally, you would start looking approximately six months before your product term ends. The reason to do it this early is so you have plenty of time to shop around and find the right deal for you. You may also be able to hold the rate you find for up to six months, allowing you to rest easy, knowing that you’ve got your rate locked in.

The following are resources to use when searching for your remortgage:

Current lender: The first place to start, ask your current lender for their best deals including product transfer options, this is when you stay with the same lender and move onto a new mortgage. Often, they’ll have quite competitive deals to try and entice you to stay with them.

Mortgage calculators: There are a plethora of calculators online for you to compare the market. Many calculators have specific functions such as being able to compare different mortgages or look at fixed rate mortgages only. You can check the wider market for deals that look good to you and then use various calculators to see if they will work for you.

Using a mortgage broker to check deals: To take all the work off your hands, you can use a mortgage broker. Brokers are professional advisers like those at CTT Private Client whose sole job is to find you the best deal for your current financial circumstances. A broker will often have access to deals you won’t be able to find anywhere else, though there will obviously be fees to pay for the use of their services. Find out more about our mortgage broker services.

How long should your mortgage term be?

It’s a simple truth but the longer the mortgage lasts, the more you repay. Because of the cumulative interest over the years, you’ll end up paying more, the longer you have a loan to pay off.

You should do everything in your power to shorten the total term of your mortgage. A standard mortgage total term is usually 25-35 years; if you can, try not to extend this time when you remortgage.

Choosing to go with cheaper repayments to help ease the financial burden might feel great in the short term, but you’ll be paying more in the long run.

Remortgage fees

Unfortunately, there is a cost attached to remortgaging. This could be as much as £2,000 in some cases so make sure you factor this in before you make your application.

Arrangement fees: The largest fee you will face when remortgaging. It will be anywhere from around £1,000 – £2,000 usually. However, in some cases there may be no arrangement fees involved in the remortgage process.

Booking/reservation fee: Not seen very often in modern times. If you do have to pay this, it will be a few hundred pounds.

Valuation: The survey carried out on your home for a remortgage is usually free. This is more a formality and is just to ensure the house actually exists and is in a liveable state.

Legal fees: If the standard legal work is required, this is typically free with a remortgage. Anything out of the ordinary, you should expect to have to pay a solicitor’s fee.

In conclusion, remortgaging can be a powerful financial tool when approached with the right knowledge and understanding. By now, you should feel equipped with the essentials of what remortgaging entails, the various types available, and the potential fees involved.

Remember, whether you’re looking to save money, consolidate debt, or release equity, understanding your options is key to making an informed decision.

If you have any further questions or feel you would benefit from expert guidance tailored to your unique circumstances, don’t hesitate to reach out to CTT Private Client. Our experienced mortgage advisers are here to help you navigate the remortgaging process with confidence and ease. Contact us today to explore how we can assist you.