Should I remortgage? A guide to remortgaging

March 27, 2023

To remortgage or not to remortgage, that is the question.

There have been dramatic increases in mortgage rates over the past few months, and a huge amount of coverage in the media which has caused a lot of people to turn their attention to their own mortgage situation.

At PIL Southampton, we have noticed a significant increase in the queries we’re getting from clients about whether it is a good time to remortgage – taking out a new mortgage on a property you already own.

In this article, we cover the main questions we are asked on this topic so that you are more informed when you are deciding what is right for you.

Everyone’s circumstances are unique and we are here to guide you and support you – unlike us, we appreciate that you are not concentrating on mortgages every day, so our experience working in this field, looking at mortgage terms and deals every day, can be hugely beneficial to our clients.

What does remortgaging involve?

A mortgage is traditionally taken out for 25 years from the outset, although there are other mortgage terms too.

But, when you take out your mortgage, you are not signing up for one deal that lasts for that full 25 years – there are various deals set for fixed term periods; usually two to five years. So, every few years you are likely to be in a position to be looking for the next, and the best deal for you.

Remortgaging involves shopping around to make sure you are making the most cost-efficient mortgage move for you.

It is most people’s biggest financial outlay, so it makes sense to invest some time trying to get the best deal you can, and reduce your outgoings, just as you would when you are looking around for the best deal you can get from an energy provider or broadband provider, for example.

Why do people choose to remortgage?

The most common reason for remortgaging is when you come to the end of a fixed rate mortgage period and you are automatically moved on to that lender’s higher standard variable rate, which can be an unwelcome increase to your monthly expenditure.

There are also other reasons people choose to remortgage…

If your financial circumstances have improved, perhaps by receiving a substantial inheritance, or getting a generous pay rise. You may want to use these extra funds to overpay into your mortgage and bring your capital and subsequent interest payments down.

You may feel that there are more competitive mortgage deals on the market than there were when you committed to your current mortgage. Even if you are still tied to an existing deal, it may be worth paying an early repayment charge (ERC) and potential exit fee if you look at the longer-term numbers which show the overall savings you will be making.

If the value of your home has increased significantly since you signed up to your current mortgage, it might be the case that you are now in a lower ‘loan-to-value’ band which would mean that you are eligible for lower mortgage interest rate deals.

If your current mortgage deal doesn’t let you overpay, or only lets you overpay a small amount, it could be worth you remortgaging, however you’ll need to do your sums weighing up the benefits of overpaying compared to any early repayment fees or exit fees.

You might be interested in a more flexible mortgage, for example one that allows you payment holidays because it would be convenient whilst you are changing jobs, going travelling or going back into education. Or, you might like the sound of a different type of mortgage that combines your savings account with your mortgage. Just bear in mind that nothing comes for free, and these ‘extra option’ mortgages are likely to come with higher interest rates.

Some people worry when they hear that interest rates are going up. However, don’t jump too soon – if the Bank of England’s base rate is predicted to rise then, yes, depending on your mortgage terms it may affect your mortgage payment, but if it is your lender’s rates that are going up, it may only affect new customers.

Wanting to borrow significant extra funds can lead some people to ask their mortgage lender for extra money, as the interest rate on a mortgage can look attractively lower than a separate, standard loan agreement. You might be looking to pay for home improvements or a car, or pay off other debts.

We would advise you to really think about the long-term financial implications before you go down this route. Borrowing at 4% over 15 years is more expensive than, say, borrowing at 10% over 5 years.

When should I not remortgage?

It sounds obvious, but if you’re already on a great rate there’s no incentive to move, especially as remortgaging usually comes with arrangement fees. However, it’s always sensible to look ahead and start shopping around to see what the best deals are, for when your current mortgage deal comes to an end.

If your reason for remortgaging is to switch from an interest-only to a repayment mortgage, you shouldn’t need to remortgage to do this as this should be a straightforward change that your current lender should be happy to make for you.

You could even change part of the loan to capital repayment and leave part of the loan on your current interest-only deal. This can be useful if you have an underperforming endowment mortgage that is expecting to be in a shortfall position at the end of the term.

Note that this flexibility only works one way – a lender is much less likely to agree to you switching from a repayment mortgage to an interest-only mortgage.

It doesn’t make financial sense to remortgage once your mortgage falls below a certain level, ie around £50,000. This is because, with most mortgages, the fees you’ll have to pay to switch your mortgage will cancel out, or cost more than, any saving you’ll make from moving to a lower interest rate.

For similar reasons, it might not be financially beneficial to remortgage before the end of your current mortgage deal if the early repayment charge means it would cost too much for the remortgaging to be worthwhile. In this instance, it’s worth asking your current lender if you could switch to a better rate mortgage within their range, known as a product transfer, by paying a reduced early repayment charge.

A product transfer with your same lender could also be an option if you are looking to remortgage because your financial position has changed since you took out your current mortgage, for example if you have stopped working or become self-employed.

New lenders would need to see evidence of your income, which would make it practically impossible to secure a remortgage with another provider. In this situation, looking at a better deal with your existing lender could be an option, as there is normally less paperwork involved in the approval process.

If the value of your home has dropped significantly since you took out your mortgage, you are unfortunately a victim of what’s called ‘evaporating equity’. You may have put a 10% deposit down and borrowed 90% of the value of your home. If your home is now worth less, you may even be in a negative equity situation, where your debt is higher than the value of your property.

In these circumstances, all you can do is overpay as much as you can afford, and that your mortgage conditions will let you without incurring fees, and wait for house prices in your area to hopefully improve.

As lenders have got more strict in recent years, if you have had credit problems since you took out your last mortgage you may find it very difficult to get approved with a new lender’s credit checks and affordability calculator.

How can I prepare for remortgaging?

You can use comparison sites to benchmark the rates that are available for your circumstances.

Tip: Don’t forget to include the fees when you are comparing mortgage deals. Some lenders offer lower interest rates to get higher up in the comparison tables, but to do this they might be recouping their profits in higher fees.

Think about the credit and affordability checks that would still apply if you are applying to remortgage. Inconsistencies, even like describing your job title in a slightly different way, can trigger fraud warnings and reduce your credit rating, so be mindful of details like that.

We would also advise you to avoid applying for other credit just before you apply to remortgage. It can also be helpful to avoid exceptionally high or inconsistent spending, and to not use your overdraft in the weeks or months before you apply, if that’s possible.

Before you remortgage, carefully look at your current and predicted income and expenditure. If you have hardly any wriggle room, then going for a fixed rate deal could be the right option for you, to help you budget without the fluctuation you could get with a variable interest rate mortgage deal.

If you are currently in a fixed rate deal that hasn’t yet expired, you’ll want to check the early repayment payment (ERC) to see if it’s going to be worth your while remortgaging. The ERC is usually a percentage of the mortgage balance.

If I want to remortgage, when is the best time?

You should start thinking about your remortgage options around three months before your current fixed interest rate, tracker or discount mortgage term is due to end.

If you don’t have arrangements in place to remortgage when your fixed term deal ends, your current lender will automatically move you to their standard variable rate. It may be higher or lower than your previous fixed term rate, as it will change in line with the Bank of England base rate but, whatever the rate, you won’t have the certainty of knowing exactly what your monthly mortgage will be.

Also, timing wise, it could be that you’re now in a position to pay more every month, and are ready to switch from an interest-only mortgage to a repayment mortgage.

How do I get a remortgage?

You should start thinking about your remortgage options around three months before your current fixed interest rate, tracker or discount mortgage term is due to end.

Also, timing wise, it could be that you’re now in a position to pay more every month, and are ready to switch from an interest-only mortgage to a repayment mortgage.

Can self-employed people get a remortgage?

Yes, absolutely. There’s no doubt that it can be harder to pass a lender’s credit check and affordability calculator processes, which can make it more complicated to get a remortgage approved, but there are still options available to you.

You can maximise your chances by being prepared with as much documentation as possible. If you run your own business or are self-employed, you should be able to provide three years of business accounts – some lenders will accept two.

Alternatively, if business accounts aren’t available or they aren’t practical for the way you work, providing two to three years of tax returns will be accepted by many lenders.

Note: lenders will assess your income based on your net profits, not your business turnover.

Can I remortgage when I’m nearing retirement?

Yes, you can. As an older homeowner, you may have a strong loan to value ratio from building up equity in your property, either from paying off most of your mortgage or from your property’s value having massively increased over what could have been decades living in the same property.

The better the loan to value ratio, generally speaking the more attractive the mortgage interest rates are.

Each lender has an upper age limit for remortgaging, whether they calculate this by the borrower’s current age or the age they will be when the mortgage ends.

Typically, most lenders will want the mortgage paid off by the time you are 85, so the age you are when you remortgage will define how long your mortgage term could be.

You will need to show the lender that you will be able to afford the repayments throughout the term of the mortgage, even when you are retired. Some types of pension, like a Defined Benefit pension, are very reliable and should satisfy most lenders’ affordability checks.

If you are not retired, lenders will look at what date you expect to retire, how much is in your pension pot and what your overall retirement income will be.

How PIL Southampton can help you with remortgaging

We can look at all the options that are available to you, and help to advise you on the best deal to suit your individual circumstances.

Our priority is to make the process as straightforward as possible for you, using our extensive knowledge and experience.

How you can contact PIL Southampton

Our friendly, knowledgeable mortgage advisers are here to guide you through the mortgage process, minimising the stress from start to end. You can email us, fill out the contact form on our website or call us on 02380 668407.