Understanding Re-mortgages

The term 'remortgage' simply means switching your mortgage deal and/or mortgage lender.

Remortgages are very popular, and with good reason. There are lots of  for remortgages options available from banks, building societies, specialist lenders and mortgage brokers.

You can use a re-mortgage simply to switching your existing deal for a better re-mortgage rate -  more suitable conditions, better service.

You can also increase the size of your home loan (mortgage) and release capital if your property value and earnings have risen so that you can borrow more than your existing mortgage. You receive the difference as cash. 
 

Is remortgaging for you?
 

Re-mortgaging can seem like a great option:

> You may be able to substantially reduce your monthly mortgage payments.
 

> Re-mortgages offer a cost-effective means of freeing up cash.
 

 > Competition means that is quicker, easier and cheaper than ever to remortgage.

But you do have to work out the maths carefully to ensure it really is worthwhile and consider all the potential remortgaging pitfalls.  This way you should be able to decide whether remortgaging represents a winning bet or whether it makes sense to stick with what you've got.

Possible re-mortgage pitfalls

Early Repayment Charges
If you have an existing fixed, capped or discounted rate mortgage, or if you received a substantial cashback when you took your current mortgage, there is a real chance that an early redemption charge (ERC) will apply on your loan.

Typically, you will have to pay your existing lender a number of months interest should you cash in the loan before the end of the period in which you are enjoying the benefits. And watch out for overhanging ERCs, which may be levied years after the fixed, capped or discounted rate period has run out.

If you received cash-back then you will be expected to pay some, if not all, of the money you received if you move your mortgage elsewhere. It is important to work out the redemption costs carefully, because even if you move to a new lower rate, it may be many years before you receive any real benefit.

Remember, it may make sense to wait until the ERC period has passed before you switch your home loan.

Be aware of your new mortgage deal penalties

It may cost you next to nothing to change your mortgage if your current loan has no Early Redemption Charges. However, be careful when selecting a new mortgage with a low interest rate, as the price you may have to pay in the future for the lender's initial generosity could be early redemption charges applied to the new loan.

It pays to shop around, as some lenders don't charge any redemption penalties at all, even on fixed and discounted rate home loans.

Out of the frying pan: Standard Variable Rates
In a fiercely competitive market, nearly every lender is keen to attract remortgage business.  They are prepared to offer a range of deep discounts, low fixed and competitive capped rates which match up to the deals they offer home buyers in order to attract mortgage customers. It is easy to believe that the grass is greener and switch to a new lender offering low rates.

However, you should bear in mind why you are currently considering changing your home loan: you are probably looking for a better deal than your current loan. Even if your new lender currently offers an attractive interest rate, can you be sure whether they will continue to do so in the future? Look at the lender's SVR (Standard Variable Rate), which should provide a measure of its current competitiveness - a low rate should mean that it is looking after its existing borrowers as well as new customers.

Act before the end of your discount period
To make the most of the competitive mortgage market always switch to a new competitive deal as soon your old deal is finished so you never have to go onto the default and expensive standard variable rate mortgage. 

Start the process at least three months before the end of your current deal to ensure there is enough time to get the transaction done in time.

Keep the benefits in mind

Remember, there ought to be substantial savings or special benefits attached to the new loan, before you consider remortgaging to a new lender.

Using a re-mortgage to consolidate debts

If you have credit card debt and/or personal loans, it is possible to consolidate all your debts into your mortgage via a remortgage.  This can make sense, as the interest rate charged on a mortgage will almost always be lower than the interest rates charged on credit cards and personal loans. But you must have some equity in your property and an increase earning multiplier in order to do this.

The process is also known as 'releasing equity' from your property. In effect, you are increasing the size of your mortgage in order to free up funds.

If you want to raise cash from your property using a remortgage, the quickest way may be to approach your existing mortgage lender, and ask them to increase the size of your mortgage. On the other hand, it could make financial sense to shop around for the best remortgage deal from another mortgage lender, and take the opportunity to get a lower interest rate.

Avoid getting into a spiral of overspending and then regularly re-mortgaging to pay of debts and make sure you can pay for the increase in your mortgage payments that may be associated with a re-mortgage.

What re-mortgage products are available

The same range of products are available for a mortgage as with a first mortgage. Click here for our informed guide to the types of mortgages available

Deciding what re-mortgage suits is basically the same process as deciding the best first mortgage..

Costs and Fees of a re-mortgage
A similar range of fees and costs will be associated with a re-mortgage as with a first mortgage, minus the purchase costs although re-mortgaging is a legal process, so there will also be legal fees to pay to a solicitor.  Click here to read our article on the true cost of a mortgage
 
 

Useful Links
 
The government's money made clear website has some excellent mortgage advice.

The mortgage advice bureau website has some useful mortgage information

www.mortgages.co.uk is another useful mortgage information site

www.fool.co.uk is a great mortgage comparison site

As is www.moneysupermarket.com

www.unbiased.co.uk is the independent financial advisers (IFA) website and is packed full of information and how to find an IFA near you