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What is Remortgage and how does it work? Guide to 2024

What is Remortgage and how does it work? Guide to 2024

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In today’s article we will look at the topic of remortgage, also known as a mortgage switch. You’ll find out what the whole process is about, when it’s worth going for it and how much you can save by switching banks. We hope this post will help you make better decisions about your mortgage.

remortgage co to jest
Mortgage conversion, or remortgage for many people, can help to save money

What is a remortgage?

In simplest terms, remortgaging in the UK (as in any other country) involves taking out a new mortgage to pay off your previous mortgage. Importantly, remortgaging can either take place with the same bank or involve moving to a different mortgage provider – it all depends on the current offers on the market.

What is remortgage made for?

Refinancing a mortgage has one obvious purpose – it’s about money, or more specifically, getting better repayment terms. Typically, by switching to another bank, you can reduce your instalment by a few or even a dozen per cent, which often translates into over a thousand pounds of savings per year. However, it’s important to note that how much you’ll have left in your pocket depends on the value of the property, the terms of your current mortgage and the amount you’ve already repaid.

How does remortgage work?

As the Times notes, mortgage terms are not fixed. Typically, the first two to five years of funding have a better interest rate than the rest of the term, after which there is a switch to other terms specified in the offer. Typically, a fixed-rate mortgage becomes what is known as a tracker product, meaning that its cost depends on the current prevailing interest rates.

In practice, remortgage works as follows: after 2 years, the interest rate freeze on your mortgage ends, causing your instalments to increase by a notional 30%. However, it turns out that a competing bank can offer you a better product which, although still more expensive than your existing mortgage, is cheaper than the new offer made by your current mortgage provider. In such a situation, it pays to terminate the mortgage agreement and take out a new one since its interest rate will be lower.

The whole process is very similar to the one you went through when buying your house, and many elements of it are even simpler.

Why can I get a lower interest rate with a remortgage?

Many of our customers still do not know how it is possible that a competing bank can offer them much better mortgage terms. There are several reasons, but we will try to list the most important ones.

LTV ratio

The loan to value (LTV) ratio determines the proportion of the amount borrowed to the value of the property. If you took out your mortgage with a 5% deposit, the LTV at the outset was 95% (100%-95%), whereas when the deposit was 10%, the loan to value ratio was obviously at 90%.

Note that with each instalment, the home you repay becomes more and more yours – the amount of the commitment decreases. In many cases, after 2-3 years of repayment, the loan-to-value ratio drops from 95% to 90%, and this makes a huge difference as it unlocks you access to new, more favourable financing offers. Of course, it all depends on the length of the financing and the interest rate, but with standard parameters, the very first remortgage will clearly affect the amount you pay each month.

Why does a lower LTV translate into a lower instalment? It’s very simple – the bank’s risk is reduced. In a situation where you would not be able to pay the mortgage instalments and your property would have to be auctioned, there is a much greater chance of the creditor (the bank) being fully satisfied when the property is much more expensive than the mortgage itself. For this reason, banks are much more willing to lend money to people who can make a larger own contribution.

Competition between banks

You have to remember that banks are businesses, exactly like insurance companies, supermarkets or computer manufacturers. Every company wants as many customers as possible and it often pays to offer a slightly lower price to attract them. Mortgages also come with promotions and a slightly lower margin is still very profitable for the bank, after all you are going to leave a lot of money with them anyway.

Your creditworthiness

There is a good chance that over time, your creditworthiness has increased. This could have been as a result of a change of job or a pay rise, a reduction in other commitments or a number of other factors that have negatively impacted your image in the eyes of the bank. Your credit score may also have improved if there have been no defaults on your payments for a long time. The more you earn and the fewer financial slip-ups you have had in recent years, the more willing you are to lend money, and this obviously makes you a good customer for the bank.

What does remortgage affect?

Lower interest rates are not the only advantage of remortgaging. Moving your mortgage is also a great opportunity to shorten or extend the term of your finance or make an overpayment with money from, for example, an inheritance. In doing so, note that since the mortgage instalment will fall, you may find that when you shorten the repayment period by a year, paying exactly the same amount, you will achieve financial freedom faster and get rid of the need to pay anyone.

Remortgaging is also a way of borrowing extra cash. For example, if you have already paid off a £20,000 mortgage, by remortgaging, you can re-borrow this money and so, you will be able to buy yourself a car or carry out an extension to your home. This arrangement is particularly useful for properties bought under shared ownership, as it is an opportunity to increase the amount of equity in the home.

When does remortgage pay off?

When does remortgage pay off?

The answer to this question is not simple. First of all, it is advisable to contact a credit advisor from Extend Finance, who will take all the circumstances into account and simply calculate it.

In principle, remortgage pays off when:

  • Interest rates are at a lower level than when you originally borrowed the money;
  • The current fixed-term mortgage contract is coming to an end (tracker products are very rarely cheaper than fixed mortgages);
  • You want to borrow more money because a mortgage is basically the cheapest form of borrowing money from banks.

Although these are rare situations there are times when a remortgage will not be viable for you at a particular time. This usually happens when you have received a mortgage on extremely preferential terms, for example during a pandemic when interest rates were at record lows. In such situations, it is definitely worth holding off on changing banks, although we recommend that you monitor the market situation regularly – offers change on a basically daily basis.

What needs to be taken into account when remortgaging?

Before you make your final decision on a new mortgage, remember to:

  • Contact a credit counselor who will take care of finding the best-fit offer for your needs;
  • Take into account the new bank’s fees, such as the so-called mortgage fee and valuation fee, which affect the total cost of financing;
  • Take into account possible penalties for early repayment of the existing mortgage, the so-called early repayment charge. Information about these can be found in the mortgage contract, but you can also contact the bank directly;
  • Consider using the savings to overpay for the loan – this could translate not only into a much lower instalment, but also a lower interest rate, as the loan-to-value parameter will change;
  • Potential savings – although this rarely happens, some people would only save a few or a dozen pounds a month, which may not be worthwhile given the cost of brokerage and time spent.

Mortgage overpayment through remortgage

Overpaying mortgages in the UK shortens the term of your finance, but has no effect on your instalment. This means that, although you will be freed from your obligations more quickly, you will not actually feel any difference for many years. If, on the other hand, you switch banks, it will be an opportunity to make an overpayment that will reduce your instalments, which will automatically improve the health of your household budget.

Admittedly, remortgaging involves additional costs, so for small amounts of overpayment (£0-£5,000) it probably won’t be worth it just for that reason, but if you’ve recently received an inheritance, severance or other large cash injection, it’s definitely worth talking to us – you might be surprised how much you’ll save.

This is pretty much everything about remortgage. We hope we have answered many of your questions and you have a much better understanding of how the mechanisms behind remortgaging work. If you’d like to further expand your knowledge, we encourage you to read articles about UK mortgages and the property buying process as well as other content on our blog.

As always, we also encourage you to get in touch. We will be happy to help you find a more favourable mortgage offer so that you pay as little as possible.

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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

Extend Finance nor The Right Mortgage Limited can’t provide advice regarding Personal Pensions, Pension planning or investment planning advice. You must seek independent financial advice from a suitably qualified professional financial adviser who may charge you for advice.

Wills, Will writing, Trusts and Trust planning are not regulated by the Financial Conduct Authority.

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