If you have anything but the smallest home loan, where the fees incurred by switching will 'eat up' the value of doing so, it is worth investigating the possible benefits of remortgaging. This is particularly the case if you are paying your lender's Standard Variable Rate (SVR), which is its 'central' expensive rate of interest that can change at any time.

What is remortgaging?

The term 'remortgaging' is often misused. Technically it only refers to when a borrower switches both mortgage deals and lenders. Staying with the same lender and taking a different mortgage product is actually called a 'product transfer' and requires the borrower to sign a document called a Deed of Variation.  If you are happy with your lender and mortgage but want to borrow more against the increased value of your home, the remortgage is actually called a 'further advance'. The interest rate at which these extra funds are lent will vary between mortgage providers, but it is unlikely to be the same cost as the rest of your deal. It may be that the further advance is lent at the lender's SVR or at a slight discount from SVR.

Motivations to remortgage

According to the Council of Mortgage Lenders (CML), remortgaging accounts for a significant 45% of the total value of all mortgage lending in the UK. This is because modern times bring with them more motivation for homeowners to remortgage than ever before. Here are the some of them: 

A better interest rate

Many people remortgage away from their lender simply to net a better rate of interest – easily done if you are paying the lender's expensive SVR. Unless you have a very small mortgage and it's not worth any fees incurred by switching deals, or you require short-term flexibility, perhaps as a result of a house move, there is usually no reason why a borrower should be forking out unecessarily for this premium rate. However, according to industry estimates, around 35% of homeowners do.

Borrowing more

Many homeowners have taken advantage of the recent house price boom, using any additional equity as security against which to take out a bigger loan. This is because mortgage rates of interest are generally cheaper than unsecured lending. So, using the funds to pay off more expensive existing debt, such as credit cards and car loans, can make sense.

But taking a 'further advance' should never be carried out lightly; you will still have to prove to your lender you are able to service the additional loan, which is likely to be payable at a higher interest rate than your existing one, and you will need to keep within your lender's maximum loan to value criteria, too, which may not be the same as the last time you looked.

And a classic trap when taking a further advance – especially when the loan is repayable at SVR – is taking on new Early Redemption Charges (ERCs) that come to an end at a different time to the main chunk of your mortgage deal. But, most importantly, house prices can go down as well as up - and if your  mortgage debt does not go down accordingly, you could restrict your options for the future when it comes to moving home or even remortgaging again.

A more suitable mortgage deal

It may also be the case that your means of repayment no longer suits your lifestyle. For example, you have had a baby or gone self-employed and the prospect of having your monthly outgoings fixed for the next five years is suddenly appealing. Bear in mind that, while a 'product transfer' should only incur minimal administration charges with your lender, this is providing you are not tied into an existing deal. If, for example, you are one year through a two-year base rate tracker deal and have to pay ERCs to leave, it will ususally make better sense to see out that 'contract' first before making the switch.

How to remortgage

These days you can carry out a lot of research into the best deals online - look at the CashQuestions comparative mortgage tables, for example - but if you would prefer the help and guidance of a mortgage adviser, you can do that too. Find an IFA near you by clicking here.

Types of mortgage deal available

CashQuestions Guide to Mortgage Costs and Fees

---

Tag this article :