Remortgaging

Chris Boyle 

Having spoken to a number of people about the topic of mortgages and in particular remortgaging it has become clear that the topic of remortgaging is in fact very unclear. This article aims to clear up any confusion about remortgages and to explain what a remortgage actually is.

Firstly lets go though some of the common misconceptions surrounding the topic. Here are some of the things a remortgage does not involve:

Moving house
A remortgage is for people who are remaining in the same property. When buying a new property you would get a first time buyer, home mover or buy to let mortgage.

Additional second mortgage
Although you can release some of the equity in your property with a remortgage it does not mean getting a new mortgage on top of the existing mortgage. A second mortgage is a new loan separate from the mortgage already associated with the property.

Equity release mortgage
As stated earlier you can release the positive equity in your property with a remortgage but this is not the same as an equity release mortgage, where there are specific plans usually designed for elderly and retired home owners.

Okay. Now we know what a remortgage is not lets go through what it actually is.

What is a remortgage?

A remortgage is basically switching mortgage deals from a standard variable rate to a lower rate that is fixed for a period (usually between 1 and 5 years). This almost always means switching mortgage lenders. You can also remortgage to release some of the positive equity in your property by getting a larger mortgage loan than the one you currently have. This is often used for debt consolidation. For a full explanation of remortgages read this remortgage guide.

So a remortgage can be used simply to save money by moving to a lower interest rate mortgage or it can be to increase your loan to free up cash tied up in your property to pay for other things such as other outstanding debts.

But why do mortgage lenders offer remortgage deals?

Mortgage lenders offer deals such as fixed rate mortgages and discount mortgages to attract new customers. The first time buyer and home mover market is decreasing now as interest rates are expected to increase, and have increased already this year. This means mortgage lenders are receiving less custom from homebuyers so they need to attract as many remortgage customers as possible. Once a homeowner switches lenders they are likely to be tied to that lender for quite some time. Once the lenders introductory interest rate offer ends the homeowner will be transferred to the lenders standard variable rate. The variable rate is usually the lenders highest rate and so this is how they make their money in the long run. This is why it is important to research a lenders variable rate if you are thinking of remortgaging with them as you are likely to be paying the variable rate at some point in your mortgage term.

Is that fair?

It has been suggested that it is unfair that mortgage lenders offer such great rates to new customers while existing customers are paying vastly more in comparison. Many lenders have justified this by saying that their customers have had the chance to enjoy low rates at the start of their mortgage terms.

Why isn't everyone remortgaging all the time?

It is probably possible to remortgage every 5-10 years and save thousands of pounds over a mortgage term by avoiding paying lenders standard variable rates. However this is not always possible. Many mortgage deals will have redemption penalties associated with them. A redemption penalty is a penalty written into the mortgage contract stating that the mortgage holder cannot end the contract within a set period without paying a charge. Some deals also have overhanging redemption penalties associated with them. This means that the redemption penalty still applies after the introductory incentive interest rate period ends. For example: If a mortgage deal has a fixed interest rate for the first five years an early redemption penalty might state that the mortgage holder cannot remortgage before those five years are up. An overhanging redemption penalty might state that the mortgage holder couldn't remortgage for a number of years after the fixed rate period has ended. This means the mortgage holder will have to pay the lenders standard variable rate for a number of years after the fixed rate period has ended, or pay a hefty redemption penalty. It is also worth finding out if the lender you are remortgaging with has any fees associated with their remortgage arrangement, although most lenders offer free arrangement deals since they are always looking to gain new customers.

In summary

• Remortgaging does not mean moving home, it is for people who already own property with a mortgage.
• You can remortgage to save money on interest rate repayments and/or to release equity in your property.
• Remortgaging almost always means switching mortgage lenders.
• Remember to find out the lenders standard variable rate because you will probably be paying it at some point.
• Find out about redemption penalties as they can tie you into a deal that you might not want to be tied into.