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Remortgaging is where you pay off your existing mortgage and switch to another lender. There are good reasons why you might consider remortgaging not least saving money but you need to consider the costs before you do. Remortgaging to pay off debt can end up costing you more than other options.
Remortgaging to get a better interest rate
When you take out a new mortgage, you normally get an introductory deal for example a low fixed or discounted rate or a low tracker rate for the first few years of your mortgage.
Introductory deals normally last for between two and five years. Once the deal ends youll probably be moved onto your lenders standard variable rate, which will usually be higher than other rates that you might be able to get elsewhere.
So when your introductory period ends, take a look at the market to see if switching to a new mortgage deal will save you money. Its also worth reviewing options before interest rates change.
Bear in mind that if you only have a small outstanding mortgage the amount you stand to save may be too low to make switching worthwhile.
Remortgaging advice What to watch out for
Before you switch be sure to check out the costs. Some lenders might offer fee-free deals to tempt you, but if they dont youll have legal, valuation and administration costs to pay.
What might look like a money saving deal could end up losing you money if you dont do your sums first.
After its review of the mortgage market, known as the Mortgage Market Review (MMR), the financial regulator has introduced new rules to increase consumer protection and ensure that lenders act responsibly.
This means that you may face tighter requirements and be asked for more information than youve experienced before.
The application process is likely to take considerably longer than you were used to and involve more than one appointment with a qualified mortgage adviser.
You will have to show evidence of your income, such as payslips and bank statements, and your outgoings, including other debt repayments, household bills and living costs such as travel, clothing, entertainment and childcare.
Lenders will have to check you can afford the mortgage and also stress test that you will be able to afford the mortgage payments in the future if interest rates were to rise.
All mortgage applications in person or over the telephone must be on an advised basis. Lenders or mortgage brokers will only be able to recommend products that are suitable for your needs and circumstances and will question you closely to work out what is suitable.
Switching to a new mortgage online or by post, without any interaction or advice from your lender is known as execution-only.
Its important to realise that if you go down the execution-only route you cant ask the lender for an opinion on which mortgage is right for you, for instance if you were undecided between two similar mortgages.
You can, however, ask about features of different mortgage products, but the lender will not be able to help you decide which mortgage to take out unless you change your mind and take advice.
If you choose execution-only, the lender will simply act on your instructions regarding the mortgage you have chosen. The lender will point out in writing that you havent received advice.
You must confirm you understand this and that you are happy to go ahead Not all lenders will offer customers the ability to use execution-only.
Taking advice from a qualified expert offers you extra protection because if the mortgage turns out to be unsuitable, you can complain to the Financial Ombudsman Service.
If you choose execution-only, where you make decisions on your own without advice, there will be fewer circumstances in which you can complain to FOS.
I want to remortgage but dont think I will meet the lenders affordability criteria
When granting new loans, lenders are have to assess whether or not you can afford to make the monthly payments. This includes cases where you want to remortgage to another lender: your new lender will need to satisfy itself that you can afford the loan.
Your existing lender, however, is allowed to let you switch to another of its deals as long as this does not involve increasing the amount you borrow (other than any fees for switching) provided that there is no formal discussion about the relative merits of the deals available to you.
When it pays to switch and when it doesnt
In the two examples below you can see how the size and remaining term of your outstanding mortgage can affect whether or not its worth switching.
In the first example, the cost of switching (£500) is greater than the saving (£239.04), so theres no point in remortgaging. In the second example, its clear that switching mortgage saves money.
| Outstanding mortgage | £15,000 | £60,000 |
|---|---|---|
| Time left until mortgage is paid off | Three years | Five years |
| Rate on current mortgage | 4% | 4% |
| Rate on new mortgage | 3% (fixed) | 3% (fixed for 5 years) |
| Total interest payments on current mortgage until mortgage is paid off | £942.96 | £6,300 |
| Total interest payments on new mortgage until mortgage is paid off | £703.92 | £4,680 |
| Saving on interest payments | £239.04 | £1,620 |
| Cost of switching (legal, survey and exit fees) | £500 | £500 |
If you change your mortgage before the end of your deal you may have to pay a fee to do so (called an early repayment charge)
You can use the links below to check current deals and work out what you might save by switching. But remember to check associated fees and costs.
Use our Mortgage calculator to see how much you could save by switching
Mortgage related fees and costs at a glance
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.
We recommend the following websites for comparing mortgages:
Remember:
- Comparison websites wont all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
- Find out more in our guide to comparison sites
To find out how much you can afford to borrow use our Mortgage affordability calculator.
Reducing your loan-to-value to get a better rate
Every mortgage deal has a limit to how much you can borrow when compared with the current value of the property. This is shown as a percentage and is called the loan-to-value.
When you remortgage, the lower the loan-to-value you need, the more deals that may be available to you and you may be able to get cheaper mortgage deals.
How to calculate your loan-to-value
- Divide your outstanding mortgage amount by your propertys current value.
- Multiply the result by 100.
Example
- Your outstanding mortgage is £150,000
- Your lender thinks your property is worth £200,000
- 150,000 divided by 200,000 = 0.75
- 0.75 x 100 = 75 so your loan-to-value is 75%
Use the links below to get an idea of your homes current value.
Your lenders valuation
Bear in mind that when you apply for a mortgage, the lenders valuation may just involve checking the outside of the property from the street.
If you think the valuation is much too low and that youre losing out on a better rate as a result ask the lender to reconsider.
To support your case, you could provide evidence of the sale price of a few similar properties in your area and, if relevant, list the cost of any expensive home improvements youve carried out.
If as a result of cost savings you can make by remortgaging, youre wondering whether to pay off your mortgage early, read our guide below.
Remortgaging for more flexibility
Remortgaging may also enable you to get a more flexible deal perhaps you can get the opportunity to overpay.
Or maybe you want to switch to an offset or current account mortgage, where you use your savings to reduce the amount of interest you pay permanently or temporarily and have the option to draw your savings back if you need them.
Mortgage special features
Remortgaging to consolidate debt
If you have a lot of debt, you might be tempted to borrow some extra money from your existing lender and use it to pay off your other debts. Or, you might want to remortgage with another lender for a higher amount to pay off other debts.
In both cases you will need to take advice, and following the introduction of new rules, lenders must apply stricter checks to make sure you can afford to repay the higher amount.
If the lender considers that you cant afford to borrow more, you will be turned down.
Even though interest rates on mortgages are normally lower than rates on personal loans and much lower than credit cards you may end up paying far more overall if the loan is over a longer term.
Instead of adding your debt to your mortgage, try to prioritise and clear your loans separately. Read our guides below to help you get organised.
How to prioritise your debts
Take action to reduce your debt
Where to get free debt advice
If youre still thinking of remortgaging to pay debt, make sure you understand the facts.
Disadvantages of consolidating debts into your mortgage
- All your debt is now secured against your property. That means if you cant keep up your repayments, you might lose your home. Debts such as personal loans and credit cards are not secured against your home.
- Once youve remortgaged, you may think youve solved the problem and carry on spending. Then youll run up more debt perhaps on your credit card and your situation will be even worse. Debt consolidation only makes sense if you use it as an opportunity to get back on track and cut your spending.
- Mortgages are long-term loans. Low interest rates are attractive, but it may be 20 years before youve paid off the debt. Look at this example:
| Type of debt (based on £10,000) | Duration of debt (debt paid off in this period) | Interest rate | Total interest paid |
|---|---|---|---|
| Mortgage debt (repayment mortgage) | 20 years | 4% | £4,541.60 |
| Credit card debt | 3 years | 18% | £2,824 |
| Mortgage debt (repayment mortgage) | 10 years | 4% | £2,148.80 |
| Personal loan | 5 years | 8% | £2,104 |
You can see that repaying the mortgage debt over 20 years works out as the most expensive option even though the interest rate is low. When you consolidate, you may not realise that its taking you a long time to pay off your debt, and that can be expensive.
Only remortgage to pay off debt as an absolute last resort and after speaking to a debt advice agency. If you do pay off debts in this way, make sure you borrow it over the shortest period you can.
Where to get free debt advice
Review your mortgage regularly
As the examples above show, you can save a lot of money by remortgaging. So make sure youre reviewing your mortgage regularly.
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