How does remortgaging work?

Remortgaging can save you hundreds of pounds. But there are a lot of things you need to be aware of to make sure you’re getting the best deal.

Why should I remortgage?

When you first took out your mortgage, you might have signed up for a really good deal. But over time, the mortgage market changes, and new deals become available. This means there might be a better deal available for you now, which could save you hundreds of pounds.

You won’t necessarily have to change lender.

Remember to check if there are any arrangement or product fees on any new mortgages you’re looking at, and if you’re ending your mortgage deal early, any early repayment charges from your existing lender.

These fees can add to the cost of remortgaging and might make remortgaging more expensive than staying on your current deal.

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When should I remortgage?

You can remortgage at any time. But if you’re not at the end of your fixed rate term, you might have to pay an early repayment charge.

Most people remortgage when they get to the end of their fixed rate term as this is when your mortgage might stop being a good deal.

Why it pays to switch and when it doesn’t

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So, how can you work out if remortgaging really is getting you a better deal?

In the examples below you can see the different amounts you would pay in total, over the fixed period, per month and in interest, depending on if you stuck with your original deal or moved to one of the two remortgaging options.

Both option 1 and option 2 save you money compared with sticking on your original deal. However, the arrangement fee on option 2 makes it more expensive than option 1.

Remortgaging examples
Mortgage loan amount
Staying on current deal £175,000
Option 1 £175,000
Option 2 £175,000

Term of loan

20 years

20 years

20 years

Interest during fixed period

5%

3%

3%

Arrangement or product fees

0

0

£2,000 arrangement fee added to mortgage

Total cost of mortgage over 20-year term

£291,196

£271,719

£274,824

Total interest charged over 20-year term

£116,196

£96,719

£97,824

Total monthly payment

£1,155

£971

£982

Cost of mortgage over five-year fixed period including interest

£69,295

£58,233

£58,898

If you change your mortgage before the end of your deal you might have to pay a fee (called an ‘early repayment charge’).

The total cost for credit is based on any mortgage related fees being paid upfront and not added to the mortgage. Mortgage-related costs can vary between providers and make your repayments bigger if you  add them to the loan. The cost over the deal period is based on the initial rate remaining the same over that time and assumes that it will be reverted to the lenders standard reversion rate or SVR of 6%. The calculator is for a repayment mortgage where interest is calculated monthly. The results apply to daily interest where only one payment is made per month. Figures quoted have been rounded

Check the costs

Before you switch, be sure to check out the costs.

Some lenders might offer fee-free deals to tempt you, but if they don’t, you’ll have legal, valuation and administration costs to pay.

You can use the Annual Percentage Rate of Charge (APRC) to help you compare deals.

The APRC is a way of calculating interest rates incorporating some mortgage-related fees in the calculation, giving you a way to compare mortgage deals.

What might look like a money-saving deal could end up losing you money if you don’t do your sums first.

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Reducing your loan-to-value to get a better rate

Every mortgage deal has a limit to how much you can borrow when compared with the current value of the property.

This is shown as a percentage and is called the ‘loan-to-value’.

When you remortgage, the lower the loan-to-value you need, the more deals that might be available to you – which should get you cheaper mortgage deals.

How to calculate your loan-to-value

  1. Divide your outstanding mortgage amount by your property’s current value.
  2. Multiply the result by 100.

Example

  • your outstanding mortgage is £150,000
  • your lender thinks your property is worth £200,000
  • 150,000 divided by 200,000 = 0.75
  • 0.75 x 100 = 75 – so your loan-to-value is 75%.

Remember to check associated fees and costs.

Your lender’s valuation

When you apply for a mortgage, the lender’s valuation might just involve checking the outside of the property from the street.

If you think the valuation is too low – and you’re losing out on a better rate as a result – ask the lender to reconsider.

To support your case, you could provide evidence of the sale price of a few similar properties in your area and, if relevant, list the cost of any home improvements you’ve carried out.

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Remortgaging to get a better interest rate

When you take out a new mortgage, you normally get an introductory deal.

It’s most likely a low fixed or discounted rate or a low tracker rate for the first few years of your mortgage.

Introductory deals normally last for between two and five years.

Once the deal ends, you’ll probably be moved onto your lender’s standard variable rate, which will usually be higher than other rates you might be able to get elsewhere.

So when your introductory period ends, take a look at the market to see if switching to a new mortgage deal will save you money.

If you only have a small amount left to pay off your mortgage the savings from switching  might be too low to make it worthwhile

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Remortgaging for more flexibility

Remortgaging might also help you to get a more flexible deal – for example if you want to overpay.

Or maybe you want to switch to an offset or current account mortgage, where you use your savings to reduce the amount of interest you pay permanently or temporarily – and have the option to draw your savings back if you need them.

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Remortgaging to consolidate debt

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If you have a lot of debt, you might be tempted to borrow some extra money and use it to pay off your other debts.

Even though interest rates on mortgages are normally lower than rates on personal loans – and much lower than credit cards – you might end up paying more overall if the loan is over a longer term.

Instead of adding your debt to your mortgage, try to prioritise and clear your loans separately.

Check the market for mortgage deals

Use our Mortgage Affordability Calculator to find out how much you can afford to borrow.

Here are some of the main websites for comparing mortgages:

Remember:

  • Comparison websites won’t all give you the same results, so make sure you use more than one site before deciding.
  • It's also important to do some research into the type of product and features you need before making a purchase or changing supplier.

Get advice

Taking advice from a qualified expert offers you extra protection because if the mortgage turns out to be unsuitable, you can complain to the Financial Ombudsman Service (FOS).

If you choose to go down the ‘execution-only’ route (where you make decisions on your own without advice), there will be fewer circumstances where you can complain to FOS.

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Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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