When To Remortgage (And When Not To)
13th December 2016
Your initial mortgage rate will typically last a few years, and it’s sensible to start looking at your remortgaging options about three months before it finishes. You can also remortgage before your deal ends, but your mortgage lender will usually impose an early repayment charge.
Remortgaging when your initial rate ends
When you first take out your mortgage, the lender will usually provide an initial rate that lasts between two and five years.
When you reach the end of your initial rate, most lenders will move you onto their Standard Variable Rate (SVR), which tends to be higher than both your initial rate and other competitive deals currently available on the market.
Example: A lender may offer you a fixed rate of 1% for the first two years of your mortgage, and then transfer you to a Standard Variable Rate of 4% for the remaining term. The SVR will depend on the lender, but it’s often set at a few percentage points above the Bank of England’s base rate, so it can go up and down.
Trussle mortgage adviser Ryan Tuff says: “Since initial rates will almost certainly be a lot more competitive than the lender’s Standard Variable Rate, most borrowers can save by remortgaging once their initial period has ended. Switching from a lender’s SVR of 4.63% to an initial rate of 1.39% for example, could save the average homeowner £3,500 per year during the new initial period.”
*Based on a mortgage amount of £173,400 repayable over 25 years, as of Nov ‘16
For more information about finding remortgage rates read our article, Where To Remortgage.
Think about switching your mortgage around three months before your initial period ends. This will give you more time to find an attractive rate, since mortgage offers are valid for several months. Bear in mind that it can take up to two weeks to receive an offer from a mortgage lender. If you don’t remortgage before your initial rate finishes, you’re likely to end up on the SVR (but you can still remortgage later on to switch to a potentially better rate).
In some situations, remortgaging when your initial term ends may not make sense. For example, if you’re within several months of paying off your mortgage, the cost of remortgaging may be higher than the remaining loan amount.
Remortgaging before your initial rate ends
You can choose to remortgage before your initial rate ends, but your mortgage lender will usually penalise you for doing this with an ‘Early Repayment Charge’ (ERC). This is usually charged as a percentage of the loan – for example, 3% of the outstanding loan – which means it can cost you thousands. You’ll need to balance this charge and any other costs of remortgaging against the benefits you hope to gain.
Here are some of the reasons you may want to remortgage before the end of your initial mortgage term:
to borrow extra money (perhaps to pay off other debts or for home improvement)
to move to a more flexible mortgage (because you want to make overpayments, for example)
to take advantage of a dramatic fall in rates (if rates are significantly lower than your existing rate, the savings of switching early could outweigh a lender’s exit fee)
to switch to a longer (or shorter) term
to switch from a variable rate to a fixed rate, or from an interest-only to a repayment mortgage
If you’re remortgaging because you want to borrow more money using the equity in your home, bear in mind that although the interest rate may be lower than other types of borrowing (unsecured loans and credit cards, for example), the longer mortgage term will often mean that you pay far more over the lifetime of the loan. It may be more sensible to find other ways of managing your non-mortgage debt.
When you’re looking at remortgaging, take into account any lender or product fees in addition to the interest rate to ensure you’re getting a good deal.
Consider product features when you’re making a decision: will your new mortgage allow you to make overpayments that can reduce the amount you’ll repay over the remaining term of your mortgage, for example?
You could also choose a shorter mortgage term when you remortgage if you want to pay your mortgage off sooner. Be careful, as this will result in increased monthly repayments.
Remember to take into account the cost of a property valuation and solicitor fees when you’re making your remortgaging decision, as these can add up.
Read our article, How To Remortgage (In 6 Simple Steps) for a clear and simple guide through this process.
Keeping track of your current mortgage
A free service like Trussle’s mortgage monitor can give you the peace of mind that you’re not paying more for your mortgage than you need to. It compares your current mortgage with the market each day, searching through more than 11,000 mortgage products from over 90 lenders.
When it’s time to think about remortgaging - either three months before your lender’s Standard Variable Rate is applied, or when a better deal is available during your initial term - Trussle will notify you and help you switch to the right mortgage to suit your needs.