Remortgaging involves paying off your existing loan and replacing it with a new loan – often with different terms, such as a different interest rate.
There are multiple reasons why you might decide to remortgage, but some of the most common include:
Once your remortgage has completed, your lender will use the new mortgage to pay off the old one. You’re then left with just one mortgage and one monthly payment.
While the remortgage process tends to be more straightforward than the original house-buying process, it still involves several complicated steps, so don’t take the decision to remortgage lightly. You can use remortgaging calculators and comparison sites to help you assess how much money you’ll save, if any.
When you remortgage your mortgage, your lender will ask for much of the same information you gave the lender when you first bought your home. This includes details about your income, outgoings, assets, and credit score. That way, they can accurately check whether you meet their criteria for affordability.
Luckily, although remortgaging your mortgage can be a minefield, we’re on hand to make the process a whole lot easier. Here are some common mistakes to avoid when refinancing your mortgage for the best chance of success.
It’s tempting to just stick with the same lender you’ve had ever since you first bought your home. Doing so can seem easier and more convenient, especially if they’ve provided you with a good service so far. Plus, lenders spend significant sums of money on marketing, convincing you to do just do that. Just as you shop around for your car, home and holiday insurance, it’s important to do the same when you remortgage, not doing so could be costly.
By going with your current lender at a 5.2% rate, you could miss out on a 4.5% rate being offered to you as a new customer by another lender.
Lenders tend to offer their best rates and add extras like cashback to new customers rather than existing ones, so shop around for the best deal before going ahead with the remortgage process. A mortgage broker can weigh up the costs of staying with your current lender or remortgaging with another lender, this can save you time and money.
While the mortgage rate is one key metric to look out for when assessing a lender’s suitability, it’s not the only one. By fixating on the rate alone, you’re likely to miss other red flags in the deal offered by a lender.
If a deal seems too good to be true, it usually is. When a lender is offering an interest rate that’s significantly lower than the competition, it tends to be disguising incredibly high fees. Some rates may come with incentives such as a free valuation, free legals or no fees. These incentives can outweigh the benefit of going with a lower interest rate.
Instead of basing your decision on interest rates alone, ask about all the fees included in the loan first.
If you have remortgaged to a new lender with a lower interest rate that has high fees, it’s important to consider how long it will take for you to recover the fees paid to get this rate. The lower the reduction in your interest rate, the longer it will take you to recover the fees you paid to get your new deal. Ideally, you’re looking to reach your break-even point (the time it takes your savings from remortgaging to exceed the amount paid in fees) as quickly as possible.
Let’s imagine you paid £2000 in fees but only saved £20 in interest per month by remortgaging. As a result, it would take you 100 months to recuperate what you spent. You’ll possibly even have sold your home by that point, so it’s not actually a good saving.
It is important to consider how long it will take you to reach your break-even point before going ahead with a new deal.
Even for professionals in the finance industry, interest rates are notoriously hard to predict. You might decide to remortgage when rates are low, only to watch them shoot back up only a week later.
Instead of trying to time mortgage rates down to the day, week, or month, keep an eye on overall trends and focus on getting a remortgage deal that meets your needs and circumstances now.
Taking out too much equity
It’s common for people to remortgage their property to borrow against their home’s equity. This is typically done to generate cash for investments like a second property or business, home repairs, or a financial emergency.
While taking equity out of your home isn’t a bad idea (after all, rates may be low compared to other types of loans), be careful not to take too much. Doing so can leave you vulnerable if housing prices were to fall or can increase your monthly payments so much that your disposable income suffers as a result.
It’s very tempting to put as long a term as possible down for your loan and lengthen it when you remortgage. While this can lighten the load of your monthly costs, you’ll end up paying substantially more in interest over the course of your mortgage.
Instead, balance your short-term need for low monthly payments with the long-term interest you’ll accrue and strike a balance that doesn’t penalise you with higher interest payments or leave you with an unaffordable monthly sum.
Making a large purchase on credit months before you remortgage is a recipe for disaster. Lenders will do a credit check before they agree to the new loan they’re providing you with, and if they see your debt-to-income ratio has suddenly increased, they might not approve your application.
Having a high credit score and few monthly outgoings leaves you in the best position possible to get accepted for an attractive new deal.
It’s easy to fall into the trap of clever company marketing, especially if it’s your first time remortgaging your mortgage. Luckily, by avoiding these seven common mistakes, you’ll walk away with a great deal and a much higher chance of getting accepted by your lender of choice.
Taking your time is also important. By properly preparing your finances and adequately shopping around for the best deal, you’ll reap the financial rewards in the long run.