11 min read

The truth about remortgaging

Andre Spiteri
15 May 2017

Fact vs fiction: unpacking 5 common remortgaging myths.

While many mortgage lenders entice you with attractive introductory offers, your ongoing loyalty is rarely rewarded.

Changing your mortgage provider could significantly cut your interest rate and reduce your monthly mortgage repayment. But, unfortunately, because there are so many misconceptions surrounding remortgaging, you might be put off doing so.

In this article, we set the record straight on five common remortgaging myths.

Myth 1: remortgaging should be your last resort

One of the most common misconceptions about remortgaging is that you should only consider it if you need credit and can’t obtain it any other way. But this isn't necessarily the case. Here are just three other reasons why you’d want to consider it:

To get a better interest rate

If you’re on a fixed-rate mortgage, you’ll typically get the same interest rate for three to five years, which means your mortgage repayment is the same every month. But once the fixed term expires, you’re put on a higher standard variable interest rate. Since you’ll start paying more interest, your mortgage will become more expensive.

If the fixed term on your mortgage is about to expire, it’s a great time to shop around and see whether you could get a better interest rate. For best results, start your search for a new mortgage about 14 to 16 weeks before your fixed term expires. That way, there’ll be enough time for the paperwork to go through, which means you can transition from the fixed rate period on your current mortgage straight into your new mortgage.

Choosing a more flexible deal

Perhaps you’d like to be able to take a payment holiday. Or maybe you want to increase your monthly repayment amount but your current mortgage provider won’t let you. Whatever the reason, chances are there’s a mortgage out there that’ll offer you this flexibility.

Do keep in mind, however, that nothing comes free. In other words, the increased flexibility may be offset by a higher interest rate or additional fees.

Switching from an interest-only mortgage to a repayment mortgage

You don’t necessarily need to remortgage in order to switch from interest-only to a repayment mortgage. Repayment mortgages are less risky for your lender, so making the change shouldn’t be a problem.

However, you won’t necessarily be getting the best deal out there. And since you’re going to change the terms of your mortgage anyway, you might as well have a look at what else is on the market.

What is remortgaging?
Remortgaging means replacing your existing mortgage with a new one. You can do this by going to your current mortgage lender or switching to a new provider.

Myth 2: remortgaging will increase your debts

The opposite is actually true.

One of the main reasons to remortgage is that you can replace your current mortgage with one that has better terms and conditions. This can result in a lower interest rate, lower fees and lower monthly repayments.

With that being said, you can also remortgage in order to raise more credit or to consolidate your debts. However, while you might technically be increasing your debts in this case, you’ll be paying only one interest rate instead of different rates on different debts. What’s more, mortgage interest often works out cheaper than borrowing on a credit card.

Myth 3: it’s all about the interest rate

While the interest rate is an important factor when choosing a new mortgage, it shouldn’t be the be-all and end-all of your decision. It’s also important to consider the cost of remortgaging, as this can outweigh any savings you stand to make.

When you remortgage, you can expect to pay fees both to your existing lender and to the new one. By examining these fees carefully, you can decide whether remortgaging is worth your while.

Fees owed to your current mortgage lender

Normally, you’ll have to pay your lender an early repayment fee and an exit fee.

An early repayment fee - typically 2% to 5% of the outstanding amount - is a way for the lender to make up for lost earnings if you end your deal early. Many lenders only charge an early repayment fee if you repay the loan within a certain period, which means you can avoid paying it by waiting out the term.

The exit fee is an administrative charge. You’re basically paying your lender to forward the title deed to your property to your solicitor. Most lenders will give you the option of paying this fee upfront.

Check the fees carefully
Your mortgage provider should give you a schedule of all applicable fees and charges when you first take out your mortgage. If you’re asked to pay a fee you weren’t aware of, check your paperwork carefully. If a fee wasn’t communicated to you ahead of time, your lender shouldn’t be charging it.

The cost of switching to your new mortgage provider

Your new lender may also charge fees, primarily a booking fee and an arrangement fee.

The booking fee is essentially an application fee, usually in the region of £200. Not all lenders charge it. However, the arrangement fee - the fee you’re charged for taking out the new mortgage - is quite steep. Expect to be charged £1,000 or even more.

Helpful hint
When you remortgage, you’re often faced with one of two choices:

1 - a low interest rate with a high arrangement fee

2 - a high interest rate with a low arrangement fee

Your choice largely depends on the size of your debt. If you have a large outstanding balance, it’s might be better to pay the high fee in exchange for a low interest rate. If, on the other hand, you’ve paid off a significant part of your mortgage, the second option could be better suited.

You can normally choose to pay the arrangement fee upfront or add it to your mortgage. Both have their downsides. If you pay the fee upfront, you risk losing it if your mortgage doesn’t go through. Conversely, if you add it to your mortgage, you’ll have to pay interest on it.

As luck would have it, there’s a way around both. Add the fee to your mortgage, then pay it off immediately. This eliminates the risk you might lose the fee while also avoiding interest. Of course, for this to work, your new mortgage lender must allow overpayments. Check this out beforehand.

Myth 4: remortgaging is complicated

On the contrary, remortgaging is a fairly straightforward process. The trick is to start early, so you have enough time to shop around and find the deal that suits you best. Here’s how it works:

Step 1:

Ask your current mortgage lender whether they’re offering any new deals. Remortgaging with your current lender is usually a quicker and cheaper process. You’ll also have a benchmark against which to compare other mortgage products.

Step 2:

Compare the deal you’re offered by your current lender to mortgages from other lenders. Don’t just focus on the interest rate. Also check what fees apply. This will help you decide whether remortgaging is actually worth it.

Step 3:

Apply for your new mortgage. Your new lender will make a decision about your application based on your credit history and an affordability assessment. If you’re approved, your new lender will liaise with your solicitor for the transfer of your title deed. Your solicitor will also make the necessary arrangements for the old mortgage to be repaid.

That’s it. Barring any complications, the process should be complete within two to three months.

Myth 5: you can’t remortgage if you have bad credit

It’s definitely possible to remortgage, even if you have bad credit.

Of course, the best possible deals probably won’t be available to you if you have bad credit. It’s likely your lender will want to charge a higher interest rate to offset the higher risk you present. However, with some planning ahead, it’s perfectly possible to strike a reasonable deal.

Start by using ClearScore to get your credit report free of charge. That way, you’ll know what you’re working with. Look out for any mistakes and fix them. This is also a good time to start taking steps to improve your score.

Next, talk to your current bank. Explain your situation and ask for their advice on your chances of getting accepted. This avoids an unsuccessful application, which leaves a negative mark on your credit report.

You may also want to consider hiring a mortgage broker. By looking at your credit file, a mortgage broker can direct you to those lenders who are most likely to accept your application. This avoids a situation where you’re turned down by multiple lenders in a short span of time, which can further damage your credit score.

Finally, remortgaging is also a great opportunity to start rebuilding your credit history. If you have multiple debts, you might want to consider consolidating them into your mortgage. This will make it easier to stay on top of repayments and show your lender you can handle your debts responsibly. As a plus, it may also work out cheaper, as interest on credit cards and personal loans is usually higher than the interest on a mortgage.

by Andre Spiteri

Andre is a former lawyer turned financial writer. Andre has written this article especially for ClearScore.

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