Let’s start by explaining what re-mortgaging and re-mortgaging products are.
Firstly, it doesn’t involve moving home. Secondly, you re-mortgage for two possible reasons. That’s either to secure a new mortgage deal and or re-mortgage products on a property you already own. Or it’s to borrow money against your property – often for home improvements.
Why might you re-mortgage? Generally you do it for any of the following reasons:
- Your mortgage deal has already come to term and you’re now on your lender’s less favourable standard variable rate (SVR).
- Will your existing mortgage product finish soon? Is the SVR looming for you.
- Maybe, you would like a better re-mortgage product so you can cut back on your monthly repayments.
- Or are you looking for a more flexible re-mortgage product so you can make overpayments.
- You want to use the equity sitting in your home to borrow more money, possibly for an extension or an upcoming expense such as a wedding.
- The value of your home has increased substantially and you can drop a LTV (loan-to-value) band and get a better deal.
- You want to consolidate your debts. (In this case, be aware that despite the fact that rates on mortgages tend to be significantly lower than on personal loans and credit cards, you could end up paying more overall if you spread your loan across a long term
Re-Mortgaging Products Explained
Firstly, these are divided into two main types: repayment and interest-only.
If you have a repayment mortgage, you pay the interest and part of the capital off every month with the goal of paying it all off by the end of the term (usually 25 years).
If you opt for an interest-only mortgages, you’ll pay only the interest on the loan. You won’t be reducing the debt on the capital you borrowed. These are rarer today and harder to be accepted for. You have to show evidence that you have a convincing plan to pay off the entire debt such as the future sale of a second home or other investments.
The difference in Re-Mortgaging Deals
In essence, again, re-mortgaging deals boil down to two types: fixed or variable. But there are different types of these re-mortgaging products.
1. Fixed-Rate Re-mortgages
These were the most popular re-mortgaging product in 2017 and this trend looks set to continue across 2018. With a fixed-rate mortgage, you get peace of mind. Your repayments will be locked in for your chosen term. Typically this is two to five years although 7- and 10-year fixes have been growing in popularity. These are a type of insurance policy against interest rates rising.
- They simplify life because you get total certainty for the fixed term as to what your monthly mortgage outgoings will be
- Your interest rate will not change whatever happens to the Base Rate so you won’t find yourself suddenly paying hundreds more on your repayments
- You avoid the rigmarole (and fees) of having to re-mortgage during the term time
- You don’t get any benefit if the Base Rate does fall
- You don’t get a lower introductory rate for a number of years as you do with many variable products
- If you do decide you need to move, perhaps because of an unplanned event such as divorce or redundancy, you may have to pay an ERC (early repayment charge); unless your mortgage lender allows you to take the mortgage with you to your new property i.e. it is ‘portable’.
- If you decide to repay your mortgage while it is still within the fixed rate period then it is very likely that you will have to pay an ERC, which can be substantial.
2. Variable Rate Re-mortgages
These come in different types but share a characteristic. Your repayments can, and will, rise and fall according to the interest rate set by your lender.
This, in turn will be influenced by the UK economy’s state of growth. The Base Rate is set by the Bank of England, which uses it as a tool to control inflation. It does this to encourage people to spend less and to save more. When inflation is rising, the Bank of England may increase the Base Rate of interest; this in turn is likely to cause an increase in mortgage interest rates.
Variable mortgage rates are also subject to housing market conditions. When fewer homes are being built or the housing market is sluggish, the drop in people buying properties mean there’s less demand for mortgages so interest rates will go down. When the housing market is buoyant, they do the opposite and go up.
This is the general rate a lender uses to lend to its home-buyers. A mortgage deal will usually revert to this interest rate when the initial mortgage deal comes to an end. The SVR is decided by the lender and your payments may increase or decrease depending on interest rate movements.
- You can leave at any time: there’s no tie-in and usually no ERC to pay.
- Your repayments can change from month to month, both up, and down
4. Discount Re-Mortgages
This is an introductory discount off the lender’s standard variable rate (SVR).
- You pay lower outgoings at the beginning
- If the SVR changes downwards, you’ll be paying less
- You can’t budget with total certainty as if the SVR changes upwards, you’ll be paying more
- If the Base Rate changes, your discount rate will likely change too
- The discount rate will only apply for a certain length of time, typically two or three years
5. Tracker Re-Mortgages
The rate usually tracks the Bank of England base rate so whatever you pay will be locked to that rate. So if the base rate goes up by 1%, your rate will increase by the same amount.
- If the rate it is tracking drops, so will your mortgage payments so you’ll be paying out less
- If the rate it is tracking rises, so will your mortgage payments so you’ll be paying out more
- You’re likely to pay an early repayment charge if you want to switch to another product, or pay off the mortgage, before end of your deal (typically two to five years).
6. Capped Rate Re-mortgages
These combine the qualities of a variable deal but with a cap for safety. Your rate will stay the same as your lender’s SVR but the cap means the rate can’t rise above a certain level.
- You get a degree of payment security as your rate won’t exceed a certain level.
- Your rate will drop if your lender reduces its SVR
- The cap tends to be set quite high
- It’s a more expensive product as the rate is usually higher than other variable and fixed rates
- They are hard to come by as there’s not many of this type of re-mortgaging product available
The Flexibility You Need
Once you’ve decided on the right remortgaging product for you, think about how much flexibility you might need too. Does the product allow you to increase or decrease what you pay? If you can overpay, you’ll be able to clear your debt all the quicker, and look to decrease the total amount of interest you have to pay. Many remortgaging products do allow this so check the terms and conditions. Typically you can overpay 10% of the outstanding mortgage per year.
Expert advice is recommended when re-mortgaging. You can contact us at MAS any time you have issues or need advice on re-mortgaging.