It can be intimidating to think about remortgaging, but consider how much you stand to potentially gain through a better deal…
With your mortgage likely being your largest financial commitment, many people potentially stand to gain tens of thousands of pounds over the course of their mortgage term by switching deals.
Perhaps you are moving home, or simply are curious to see you can beat your lender’s offer. Regardless, this short guide will help you get started and potentially help you make some serious savings.
Or, it might give you the peace of mind that you are in fact already on a great deal.
What You Need To Get A Good Deal
It’s isn’t as easy to get a good mortgage as it used to be.
You’ll need to jump through a few hoops. First of all, you’ll need a good credit score – so check your report and see what you can do to improve it. (E.g. De-linking yourself from an ex-flatmate you had shared finances with; stay out of your overdraft; avoid payday loans).
Secondly, you’ll need good equity. Ideally, you need to be looking to borrow under 60% of your current home’s value. In other words, to get the best deals you will need over 40% of the home’s value in equity. You can get some other good deals at around 25% as well.
**Equity refers to the difference between your property’s value, and how much you owe your lender. (E.g. If you owe £100,000 on your mortgage but your house is valued at £150,000, then you have £50,000 equity).**
Thirdly, you will have to meet quite strict affordability criteria. In practice, this often means that lenders will “stress test” your ability to repay, by looking at whether you could meet your mortgage repayments if rates were as high as 6 or 7%.
At this point, it’s worth asking if it’s worth going any further. It might be, for instance, that remortgaging is likely not worthwhile until you improve your credit score. Or until you get out of negative equity.
You also need to look at your current lender’s policy, and check whether there are any horrendous-looking penalties, which might make it too costly to extract yourself from it right now.
You should also probably wait if you own less than 10% of your property. People owning less than this will likely find themselves unable to get a good remortgage deal.
However, assuming you have good equity, a decent credit rating, own a good chunk of your property and aren’t facing eye-watering charged for leaving your current deal, you are in a good position to potentially benefit from remortgaging…
Preparing To Remortgage
Make sure you have access to 3 months’ worth of bank statements, proof of income, and proof of commission/bonuses when you approach the application process.
If you are a business owner or self-employed, then unfortunately you likely will have more hoops to jump through. (E.g. 2-3 years’ tax returns / accounts).
At the outset you also need to decide whether you want an interest-only mortgage, or a repayment mortgage. Unless you have a very good reason, you should be going for the latter. (The former are notoriously hard to get post-2008 financial crash, anyway).
You then need to decide between a fixed-rate mortgage, or a variable-rate mortgage. Both have their advantages and disadvantages.
With fixed rate mortgages, you know exactly what you will pay towards your mortgage each month. So you get certainty.
On the other hand, if you want to get out early down the line, then you will likely face a hefty charge. You also won’t see your payments drop if interest rates fall.
On the other hand, variable rate mortgages are highly transparent, often can be cheaper, and see your monthly payments fall if interest rates drop.
Yet you need to consider that these deals bring a lot of uncertainty. If interest rates rise, then so will your payments. Lenders can also potentially hike their rates down the line if they choose to.
Finally, take some time to think about getting a mortgage with a flexible overpayment structure.
This allows you to pay more than your minimum premiums each month, with the aim of paying off your mortgage faster. The savings here can be huge.
Just overpaying by £100 a month can often result in over £20,000 saved in interest, and a mortgage paid off years in advance. Be careful to check the small print, however, as many lenders will restrict the amount you can overpay.
Take Care With Fees
If you’ve found a good deal, just make you take into account and additional costs and fees.
The kinds of costs involved with remortgaging can include:
- Booking fees, which some lenders charge to secure a mortgage deal. This can cost over £1000, but the fees do vary a lot.
- Arrangement fees, which can cost up to £2000. In the worst cases these are paid up-front, and are non-refundable.
- Property valuation, which concerns the costs involved with surveying your property. It is often free with remortgaging, but can sometimes add extra hundreds of pounds.
It’s easy to see that in many cases, the fees and costs can add up to £2000 or more. So make sure you factor these in when thinking about remortgaging.
Do the potential savings of the new remortgage deal outweigh the fees?