Remortgages are financial transactions that replace an existing mortgage loan with a new loan from a different lender. In effect, they transfer a loan from one lender to another. The new lender repays the original mortgage debt and any existing second mortgages to the old lender(s), which leaves the borrower with just one mortgage loan, payable to the new lender.
The terms remortgage and refinance are similar, but there is one major difference. Remortgages involve securing a new loan from a different lender, while refinance loans can be provided by either the existing lender, or a different lender. You may remortgage either a first or second mortgage.
Borrowers consider remortgaging for various reasons:
- To reduce payment amounts by securing a more favourable interest rate
- To release equity in the borrower’s property
- To switch mortgage types (example: from variable to fixed rate)
Generally, the procedure for obtaining a remortgage is similar to that of any other mortgage loan. In the course of reviewing the borrower’s application. the new lender requires documentation related to proof of income, debts, and expenditures. A property valuation is usually required as well.
Certain types of fees are involved with a remortgage. These include valuation and legal fees, and sometimes loan processing fees as well. The fees associated with a remortgage can differ greatly from lender to lender.
Fixed Rate
A fixed-rate remortgage is the most common type of loan, where the interest rate is set at a specific level, usually for the life of the loan. The main advantage of having a fixed rate is knowing that your mortgage payment will remain the same each month. Sometimes the rate remains fixed for only a few years, in which case your mortgage payments will revert to whatever the lender’s standard variable interest rate is at that time.
Standard Variable Rate
On the other hand, standard variable rate remortgages have fluctuating rates of interest based on market conditions. They are usually influenced by the Bank of England base rate, but this is not guaranteed, and is at the discretion of the lender.
One disadvantage of a standard variable rate remortgage is the uncertainty of having your monthly payments increase in the future. Also, they can be more costly, and lenders might increase their rates even if the base rate has not increased.
However, there are advantages to variable rate loans. There are usually fewer restrictions placed on remortgage deals with variable rates. For example, these deals often won’t charge exit fees if you pay off the mortgage early, which is a common feature of fixed rate loans. Also, they often allow you to repay additional amounts of loan principal if you find yourself with extra cash on hand, thereby shortening the length of the loan.
Tracker
A tracker remortgage is a mortgage with a variable interest rate, but it is set at a fixed amount above the Bank of England base rate. The Bank of England base rate is decided every month by the state, so if you have a tracker remortgage, your interest rate will be affected each month.
Usually, a tracker will be set at the base rate plus a certain percentage amount. For example, if the base rate is 2.5% and your tracker is set at base plus 1%, then your tracker interest rate is 3.5%.
Some remortgage deals offer a rate that tracks the base rate for a set period of time, after which your mortgage will switch to whatever the lender’s standard variable rate is at that time. When comparing remortgage deals, you should bear these factors in mind. You can use a remortgage calculator to help you decide which option is best for you.
Flexible
With a flexible remortgage deal, you are allowed to either pay less (underpay) or pay more (overpay) than your standard monthly payment amount, depending on your income for that month. If your income is likely to be changeable, you might want to consider a flexible remortgage.
These remortgages are also attractive for people who want the ability to pay their remortgage off early. Unlike many other mortgages, flexible remortgages do not enforce fees for early payments, so you can pay them off as quickly as you like.
Joint
A joint remortgage is held in the names of more than one person, each of whom is considered responsible for repayment of the entire loan amount. When the lender performs the income check, they verify your combined total incomes to ensure that it is sufficient to meet the monthly payments. The lender does not care how much payment is made by each individual, so long as the entire amount is received each month.
Many people find that teaming up for joint remortgaging allows them to access to much higher amounts of lending than they would qualify for on their own. If you’re looking to obtain funds through a remortgage, you may find that as partners you’ll have access to substantial borrowing on this basis.
In most cases, lenders will carry out credit checks before approving any lending. All of the people participating in the joint remortgage will be subject to these checks. If any of the participants has had credit problems in the past, such as an IVA, your deal options will be more limited, but bad credit remortgages are still available.
Offset
An offset remortgage links your savings account, and sometimes your current account, to your mortgage loan. This is often very appealing, considering that saving account interest rates are much lower than mortgage interest rates.
They do this by taking using the amount in your savings account to offset the balance used for calculating the interest on your mortgage. As an example, if you owe a mortgage of £150,000 and hold cash savings of £25,000, the interest you pay will only be calculated against the offset balance of £125,000.
As well as reducing your monthly interest payment, an offset remortgage can also reduce the amount of time that it takes to pay off the loan. Another advantage to using your savings in this way is that, since they are not locked into the mortgage in any way, you can still use the funds at any time should you need them
Repayment or Interest Only
Repayment remortgages are the most common type. With a repayment mortgage, each payment is partially applied to both the interest and the principal of your loan. Each month, the balance that you owe decreases as it is paid off bit by bit.
Alternatively, an interest-only remortgage payment includes only the interest that you owe. None of your payment is applied to the actual funds lent, so the the amount you owe remains constant. This type of remortgage is often used by property developers and buy-to-let borrowers, who rely on increasing property values to repay their mortgage debts upon sale of the property.
Self Certification
The main feature of a self-certification remortgage is that you are not required to prove your income. Instead, you submit a signed declaration of your income, stating that you are financially capable of making the remortgage payments.
With most standard remortgages, you must prove your income in order to demonstrate that you can afford the repayments. Normally this involves producing bank statements and similar documentation. However, if you’re self-employed, it can be difficult to prove what your future income will be. This is why self-certification remortgages are offered.
If you are self-employed, the remortgages that are available to you are not typically mainstream. Relatively few lenders specialise in these non-standard deals, so they are generally harder to find.
It might be beneficial to employ the services of a broker if you’re searching for non-standard remortgage deals. These brokers have access to a greater selection of deals that might apply to your situation, thereby increasing your range of available options.
- Other articles you might enjoy:
A Fast Remortgage With Your Current Lender
Introduction To Property Management Services
Money-Saving Benefits Of Remortgage Loans
How Bad Credit Remortgages Can Help
How To Handle A Problem Remortgage
- Visit Aspen Dance Realty to discover all about second mortgages.