In the UK, every month there are upwards of 50,000 remortgage applications approved. This is up from 40,000 in 2016, and while they have dropped significantly in the last few months due to the effects of the Covid-19, remortgaging is still a large part of the UK property market.
There are many reasons to re-mortgage your home. For the majority, the real objective of most re-mortgages is to pay off your current debt, and move to a cheaper mortgage. If you have a £200,000 mortgage, and you get your mortgage a single percentage point cheaper, you could be saving £2,000 per year.
If you’re not looking to save money, often people look to remortgage their property to borrow further equity to buy a second property to rent out. Re-mortgaging sounds complicated, but in reality, its actually very easy and can really save you money over the long term.
How Much Can You Save?
I have talked about his in the past, but I bought the family house in 2013 for £440K, using a £90K down-payment and a £350K mortgage. I’m seven years into a 25-year repayment plan with about £300,000 left of the mortgage. I expect to pay off another £200,000 over the next 11 years, leaving around £100K on a mortgage at retirement.
House prices continue to rise in the UK and with my house now worth £600K, I’d expect to sell it for closer to £700K when I retire. Yes, I have to buy somewhere to retire, but it won’t be a £700K house just outside London. My current £300,000 mortgage costs £1,242.56 in repayments using a fixed rate, five year mortgage at 1.80%. I use to pay 3% on a fixed-rate mortgage and £1,422 per month, however given the decrease in rates, it made sense to change my mortgage and save £2,160 per year.
As I’m mid-way through this five-year mortgage, I’m probably going to re-mortgage my home again soon and try to buy a second property to rent out. Remember, it also possible to re-mortgage your property and take money out. In my case, where my primary residence is worth about £600,000, and I have a £300,000 mortgage, I could easily take out another £180K (this would take me to an 80% LTV) to buy a second property using a buy to let mortgage.
How Long Does a Remortgage Take?
To re-mortgage process typically take around eight weeks once you’ve applied. The process can be quicker, but it depends on your LTV and how complicated your application is. To re-mortgage your property, lenders will treat you in the same way as a new application as they want to be sure you can afford to pay back the loan.
The fastest way is to re-mortgage your property is with the same lender with a product called a product transfer. Because you already have a history with the lender and are merely extending your credit, the process is generally much quicker, and a re-mortgage can be arranged in 3 to 4 weeks.
In 2014, new rules and regulations were introduced to lenders in the UK to make sure that you, as a borrower, can pay back your loan. In the past, loans were made to people without any thought to whether they could pay back the loan or not. The new rules take into account your current debt level and affordability, giving you a maximum debt based on your income. Lenders will also stress test your application to make sure that you can afford the loan, even in the worst case when interest rates increase.
Before you think about re-mortgaging, you must ask yourself four questions;
- Exit Fees – Mortgage rates are constantly changing, and banks are always changing the way they offer promotions in line with how much money they have to lend out. As a result, lenders will often charge an exit fee to leave a mortgage early. You need to know how much this is, as it will affect your mortgage savings. In the above example, I moved my mortgage and saved £2,160 per year. I have seen cancellation fees of £2,500 in the past, and as such, the cancellation fee could have negated any savings.
- The Terms: You need to think about what you’re trying to achieve with your mortgage over the longer term. It’s all very good getting a re-mortgage and saving money, but what happens if it costs you money over the longer term. In my case, I re-mortgaged and fixed my rate at 1.8% for the next five years. I could have got cheaper, but I was worried interest rates would rise, and over the longer, I would pay more, even though over the short term, I have saved money.
- Credit Score: Your credit score is important. Before you apply to re-mortgage your property, it’s a great idea to make sure the details on your credit score are correct, and you have the best possible score you can have to help your application.
- Affordability and LTV: How much can you afford vs How much should you borrow, are two very different questions. I have friends that have a 95% mortgage and are struggling to pay their mortgage repayments each month just because a lender will lend you 90 or 95% doesn’t mean that you should borrow this much.
To re-mortgage your home, the process will take between four and eight weeks, depending on the complexity of the mortgage. The four steps of the re-mortgage process are below;
- Step One – Complete an Agreement in Principle. As soon as you have complete the paperwork needed for your re-mortgage, the lender will do a few quick sums and let you know whether they can lend the amount of money. The agreement in principle does not mean that you’re guaranteed to be approved for a re-mortgage, but it will help you understand your options.
- Step Two – Consider the Finer Details. Once you have an agreement in principle, you can consider all the cost needed to set up your mortgage. Remember getting a mortgage is not free and there will be an application fee, a valuation fee to confirm the value of your property, a solicitors fee to confirm the transaction and possibly an exit fee or early repayment fee if you want to re-mortgage again in the future.
- Step Three – Finalise the paper work to include information about your personal and financial circumstances.
- Step Four – Once everything is complete, your solicitor will handle the transfer of your mortgage.