What is remortgaging and how does it work?

Working out what remortgaging is can be extremely confusing if you’re not sure what mortgages are or how they work in general. This is why we have written this article to help clear up the topic of remortgaging if you’re confused.

In this article, we will go over exactly what remortgaging is and if you should remortgage for yourself so you can work out if it is worth it.

Getting the right remortgaging deal is often the hardest part of the process so as you read on we will also be going over this aspect of being a landlord.

How does remortgaging work?

Remortgaging is the process of paying off an existing mortgage with a new one, typically with a different lender. The new mortgage replaces the old one, and the borrower is required to pay off the new mortgage over a specified term.

The reason for remortgaging can vary, but it is often done to save money on interest rates or to access equity in the property. When a borrower remortgages, they are essentially switching to a new lender or mortgage product, with different terms and interest rates.

To remortgage, a borrower typically needs to go through a series of steps that involves, assessing the current mortgage that is on the property, applying for a new one and valuing a property.

When this is all decided, the deal will be closed and the lender will begin remortgaging the deal and the buyer will be able to benefit from lower interest rates.

For instance, if there is a property that is valued at an average price for the UK and has a mortgage worth £200,000, the mortgage may be on a term of up to 25 years and perhaps at an interest rate of 4%.

If you were to take out a mortgage in the year 2022, this would be a typical rate you would be charged because of the higher interest rates that are there to combat inflation at the time.

In the year 2025, perhaps interest rates may have fallen and you realise that other people are getting a better deal on their mortgage if they were to take out a mortgage in the current day.

You may then go to a lender and ask them what kind of interest rates they are charging and if they reply lower than 4%m then you would be able to remortgage a property.

Let’s say for example, the lender says that the interest rate at the time is 2.5%, they are also proposing that the term for this new mortgage is 25 years and the new value of your property due to appreciation shows you can now borrow £250,000.

The remortgage will now work as follows:

The current mortgage is on a 25 year term at 4% per year on £200,000 and the current monthly payment is therefore £1,052.46. As a result, the amount of interest over the years will work out to be £157,737.98

However, if there is a new mortgage that is worth £250,000 and is on a 2.5% interest over 25 years then the monthly payment on this will be around £1,120.15, reducing the interest paid to £100,045.16

This means you can save a sizable amount of money on your monthly mortgage payment and over the year spend over £50,000 less interest on the same property.

In instances like this, it is clear to see how a landlord or homeowner can save a lot of money on their property. The great news is that a buy to let mortgage and a residential mortgage can both be remortgaged in the same way.

In fact, most people who take out a buy to let mortgage on a fixed term will end up remortgaging their property because as the fixed term runs out, the interest rate will be put on to a variable rate.

This means the lender will likely charge a lot more interest than they otherwise would and it is in the landlord’s best interest to attempt to reduce this interest payment by remortgaging the property.

Remortgaging when self-employed

Self employment may be a life choice that you have decided on or you may have been forced into it due to a layoff or a career change. Either way, if you are self employed, before you take out a mortgage and not if you want to remortgage,

There are some things you have to be aware of:

Prepare

Because lenders are used to people having salaries and they consider them less risky, despite how many years of bank statements you can produce, staying prepared for the bigger questions a lender may ask you is something you should absolutely do.

First of all, be prepared to prove about three years worth of self assessment forms to the lender. This is not only what most lenders ask for but also what a lot of banks will ask for too for any type of loan

Next, make sure you’re able to prove that the income you’re making will last into the future. A lender doesn’t want to approve you for a mortgage and have to take back the property due to your income going down.

Showing the lender that there are clients who want to take you on or whatever income source you’re making your money from is able to last well into the future can give you a good case for approval.

In this sense, you may benefit from hiring an accountant or a legal professional who will be able to help prove there is market demand in your area of work as this can get hard to show legitimately.

Also, showing there is a good credit score under your name is the best way to have the lender approve your mortgage. Read our article on credit score if you’re not sure how to improve it.

Find professional help if needed

Finding a specialist such as a mortgage broker who deals with mortgages would be your best bet if you’re lost on the topic and you need to remortgage.

In order to find a lender that can help you, asking someone else who has remortgaged for their advice on where they found a professional that helped them could be a good place to start. Otherwise, using online reviews can ensure they are competent in their field.

What documents do you need in order to remortgage?

Remortgaging involves being able to show the lender that you have what it takes financially to be able to pay back the loan you have taken out in a property.

As a result, lenders will typically ask for:

• Banks statements
• Proof of employment
• The valuation of the property
• A passport to prove identity
• Any other financial documents that prove

Should you remortgage?

Deciding whether to remortgage a property or not depends on what you want to get out of the property deal and what the deal actually looks like. 

The reasons why remortgaging can be good is if you’re looking to secure a lower interest rate to reduce your monthly mortgage payments. This can be great for saving a bit of extra money every month or saving towards another residential mortgage.

Other reasons why you may wish to do this is if you want to access equity in your home. This is an even more effective way of saving for another deposit as you can get paid out a lump sum of money in a relatively short amount of time.

The way this works is by selling the property to another lender who will pay you back what the value of a house is. If the value of the house is more than the value of the current mortgage then you will be able to keep some money in between.

Nonetheless, this is reliant on the value of the property going up over time and you remortgaging due to capital appreciation so this is not possible in all cases of remortgaging or switching to a more suitable mortgage product.

Why should you remortgage? 

Overall, there are a series of things you should consider to find out if remortgaging a property is right for you.

The deal that your current mortgage is on is about to expire

The most favourable mortgage deals are typically offered for a limited period of two to five years, especially in buy to let mortgages. After this period, the lender may transfer you to their standard variable rate (SVR).

This rate can be considerably higher than your previous rate and current market rates. To avoid being stuck on the SVR, it’s advisable to plan ahead and begin exploring competitive rates for remortgaging three to six months before your current rate expires.

This can help you avoid any delays that may arise during the remortgaging process.

You want a better rate

If you are currently locked into an initial mortgage deal, it’s possible that you may face a substantial early repayment charge, which can range from 2-5% of your outstanding loan, in addition to a small exit fee.

Under normal circumstances, these charges should not deter you from considering a remortgage, as the potential savings can still be significant, especially if you have a large mortgage debt. However, you should carefully evaluate the costs and benefits before proceeding.

Unfortunately, for most people at present, it may be challenging to find a better mortgage deal than their current one if they are locked into an initial deal. This is due to the recent increase in interest rates, making it difficult to switch to a more affordable mortgage midway through the initial deal.

You think interest rates will increase

If the Bank of England base rate is predicted to go up, this means your mortgage payments could go up following this rate if you have the type of mortgage you have is a variable mortgage.

Having said this, most mortgages rates will not change if you have a residential mortgage as the interest rate is likely to be locked in for a long time, but if the rate that the mortgage is locked in at is still higher than current rates of interest there is still a need to remortgage.

You’ve had a pay rise 

If you’ve had a pay rise or perhaps you have managed to save a lot of money through inheritance of saving money over time, you could feel the need to pay more for the mortgage than the bank wants.

In cases like this, sometimes the bank or lender will not let you pay more on your mortgage as they don’t want you to be able to pay more as the interest rate they have you under is favourable for them.

This means remortgaging could allow you to reduce the amount of money you owe and therefore get a cheaper rate on the mortgage.

You just need to be careful that there isn’t an early repayment charge or exit fee that you have to face in the future as it may not be worth the money you save from remortgaging in some cases.

You don’t want an interest-only mortgage any more

Sometimes, you don’t even need to remortgage in order to switch away from an interest only mortgage, especially if you want to convert to a repayment mortgage. The lender will just make the change on your behalf.

Depending on the lender, you could also do a hybrid mortgage where you keep some of the mortgage that has been able to be repaid in a capital repayment and you still have some of the loan that is interest only.

Having said this, it is likely that a lender will not want you to change the mortgage from a capital repayment mortgage to an interest only deal as lenders prefer capital repayments

You want to take on more debt

Borrowing more and taking on more debt is not always a bad thing. For instance, if the lender that you’re currently with doesn’t want to lend you any more money or the terms of any agreement they give then it only leaves you the option to remortgage.

For example, one lender could have a rule that they only allow each customer to have a certain amount of loan with them or a certain amount of properties bought with their finance.

Why you shouldn’t remortgage

There are certain situations where it absolutely does make sense to remortgage a property and others where it makes more sense to want to stay in the position you’re in with the mortgage you have.

Your mortgage debt is minimal

If you have paid off most of the mortgage debt on property and you now want to remortgage, this can be hard to do because you have to account for the fee that is in place to end a mortgage early.

Usually, where there is a lot of debt to pay off, you are able to make up for this fee over time as the saying you’ll get from the remortgage is far more than any charge.

However, when there is little debt left in the property this means the margins become tighter and it becomes increasingly harder to justify it financially.

Even if there is some savings that could be made, it is still hard to justify this financially as the remortgaging process can take up a lot of time and there could be additional fees you aren’t aware of that wipe out any savings.

For instance, the new rules around section 24 or potentially having to have a mortgage guarantor could all cost you and not make it worth it to remortgage a property.

Your situation has changed

If it is the case that your salary has gone down or your ability to work is unlikely to stay where it is for the long term, it could be hard to justify remortgaging a property if you plan on paying off the new mortgage using your salary.

As a result, it could get risky for you if you take on more debt and are able to convince a lender that your situation is going to stay the same for the future.

In a worst case scenario, this could result in a bank having to repossess a property or even you having to take on more debt in order to cover mortgage payments while you pay off a house.

So, be realistic when it comes to deciding if you’re likely to be able to afford another mortgage for the next 10 to 20 years.

The value of your home has decreased

While it is not the case that you cannot remortgage at all unless the value of a home has gone up, if the value of a home has gone down, it becomes significantly harder to do so.

This is because you need to be able to show that the outstanding mortgage you do have, based on the current interest rates, is less than a mortgage you are able to qualify for now.

If the value of a house has gone down, you are only relying on the interest rates to have gone down and nothing else.

You possess limited equity

If you don’t have a lot of equity in your home it is unlikely you will get approved for a remortgage unless the current interest rates on mortgages have dropped significantly.

With little equity, there is going to be a higher loan to value ratio on the new mortgage which means the amount you owe may be close to or even more than the value of your home.

Not only does this make it hard for lenders but it also is nonsensical for the buyer who wishes to remortgage if they are going to take on even more debt in the long term in the process that is disproportionate to the home’s value.

Credit issues have arisen since you took out your last mortgage

If you have a poor credit score, again it is unlikely you will be approved for the mortgage. However, there are ways that you can potentially get approved for a mortgage that have been listed in our article on getting a mortgage without payslips.

You’re currently on a great interest rate

If you’re on a good interest rate which is below 2% but the value of your home has gone up, you may think it is better to remortgage even if the interest rates have only gone up a bit.

However, make sure you do the right maths on a deal like this as it could be the case that the value the property has gone up by is not worth it to remortgage.

Remember, an increase in interest rate from 2% to 4% is double the mortgage repayment on an interest-only deal and can happen in a few months whereas a property doubling in value is almost unheard of within less than a decade.

How to get the best remortgage deals?

If you have the best mortgage deals then you are then able to have the most amount of wiggle room when purchasing a property. 

For instance, there is a good chance you’re able to find the right deal for the amount of debt you’re willing to take on if the interest rates are lower in the current climate.

How much can I borrow when I remortgage?

The amount you can borrow is dependent on the new value of the house. Also, if interest rates have dropped.

For instance, if a property’s value has gone up by quite a lot, and the difference in the current interest rate compared to what the original mortgage had is significant, then you will probably be able to borrow more.

The exact amount this is will also vary depending on what the purchase price of the property is. It is likely there will be a greater amount available to be borrowed if the property price was originally high to begin with.

Do I have to pay a fee to remortgage?

Most mortgages will have a set date when there are no longer early repayment fees that have to be charged in a property. There are also some other fees to be aware of including:

Arrangement fees were a fee charged by the lender to set up your new mortgage. It may be a flat fee or a percentage of the loan amount, and can range from a few hundred to several thousand pounds.

There are also valuation fees. This is where a bank or lender requires a valuation of your property to determine its current value, and this can come with a fee.

Finally, you could also come across legal fees if you need a solicitor or conveyancer to handle the legal aspects of remortgaging, such as transferring the mortgage from one lender to another. 

Also, things can get even more complicated if you are attempting to remortgage and you still haven’t paid off a government loan which you have to take on to help put down a deposit for 95% mortgages with new builds.

In conclusion

To wrap things up, remortgaging a property is a process that most importantly you have to be in the right position to be in before you go ahead with it. If anything, this is what you should have picked up from this topic.

Of the people that qualify to be able to remortgage, perhaps only half would actually want to based on their goals and the position they are in as sometimes the process can do more harm than good.

Nonetheless, a remortgage is a fantastic way to save money as you invest in property. 

Not only are you able to save money on the repayments every month which can be a very important saving but remortgaging a property could give you a significant amount of money from equity pulled out of a house.

So, if you think that remortgaging is a path you’d like to go down, perhaps seek out some professional advice from a mortgage broker or a solicitor before you go ahead to make sure all of the numbers stack up.

Next, gather all the paperwork you need and speak to a lender. It could be the case that you have to obtain a mortgage in principle first or a more simple mortgage capacity report.