Why should I remortgage?
There are several good reasons to consider remortgaging your home. These include:
- Saving money
- Raising capital for a big project or expense
- To purchase a buy-to-let property, holiday home, or a second residence
- To consolidate debt
- More flexibility
Remortgaging to save money
This is the most common reason to remortgage.
Lenders tend to offer a low interest rate for a limited period (usually two to five years) on new mortgages. But once this ends, you’ll move to their Standard Variable Rate (SVR).
The SVR is usually quite high, so being on it makes your mortgage more expensive. Research we conducted found staying on the SVR could mean paying your lender up to £2,500 more in interest a year.(3)
With interest rates at historic lows, now could be the perfect time to remortgage.(3) You could switch to a fixed-rate mortgage and lock in a low interest rate for two to five years.
Willing to wait and see whether rates will fall further? A variable or tracker mortgage will probably also be cheaper than staying on the SVR.
Remortgaging to raise capital
If you want to build an extension, turn your attic into a home office, or make other home improvements, you could remortgage to raise the capital for it.
This is also known as remortgaging to release equity.
How do I remortgage to release equity?
When you take out a mortgage, you borrow against the value of your home. Most banks let you borrow up to 90% of your home’s worth. And you pay the rest with your own money.
Equity is the percentage you’ve paid yourself. In other words, it’s the part of your property that you own outright. As you pay off more of your mortgage, your equity will increase. The percentage of your home’s value covered by the loan is the loan-to-value.
Let’s say you buy a home worth £200,000. Your bank approves a mortgage of £180,000 (90% of £200,000) and you pay the remaining 10% (£20,000). Over the next five years, you pay £30,000 off your mortgage.
Here’s what happens:
- On day one, your equity in your home is 10%. The loan-to-value is 90%.
- Five years later, your mortgage is down to £150,000. Assuming your home is still worth £200,000, your loan-to-value is 75%. And your equity is now 25%, or £50,000.
You can release some of this equity by remortgaging your home for £180,000 (90% of its value). £150,000 will continue paying for your home. You can use the other £30,000 to pay for your home improvements.
Of course, in five years’ time your home could be worth more than £200,000. So, you’ll be able to release more equity. Your home could also be worth less. Which means you might not be able to release any equity at all.
Remortgaging to purchase a buy-to-let property
Rents in London hit all-time highs in December 2018.(5) But they’re also rising elsewhere in the UK. So, it’s not surprising that more and more people are looking at buy-to-let properties - properties you buy specifically to rent them out.
It’s not uncommon for borrowers to get an interest-only buy-to-let mortgage. It means that repayments are cheaper than those on a traditional mortgage because they only cover interest. The flipside is that most banks will ask you to put down a considerable deposit, typically around 25%.
If your home has increased in value or you’ve paid off a fair chunk of your mortgage, you could remortgage to release the equity. You could then use that money to pay the buy-to-let property’s deposit.
Let’s say you bought your home for £200,000. You borrowed £180,000 from the bank (90% loan-to-value) and paid the remaining 10% (£20,000) yourself.
Five years later, your home’s worth £250,000. You also paid £30,000 off your mortgage.
Since you now have £150,000 left on your mortgage and your property’s value has increased, your loan-to-value has reduced from 90% to 60%. As a result, you own 40% equity (£100,000).
Now, let’s say you’d like to buy a buy-to-let property worth £150,000. A 25% deposit would be £37,500.
You can raise the money for that deposit by remortgaging your home for £187,500 (75% of its value). £150,000 will continue paying for your home. And you could use the remaining £37,500 to pay the deposit on the buy-to-let property.
Of course, in five years’ time your home may be worth more. Or it may be worth less, which means you might not be able to release enough equity. You should also consider the following:
- Since your repayments will only cover interest, you’ll have to find another way to pay the principal amount. You could use your rental income to overpay, or you could sell the property off when the mortgage is about to end.
- As with any other mortgage, you’ll need to show your lender you can afford the repayments. That said, the affordability calculation is worked out differently. For a traditional mortgage, banks will look at your income and expenses. In a buy-to-let mortgage they’ll usually look at how much rental income you could make.
- Because they look at potential rental income when deciding on your application, banks may require you to charge at least a certain amount of rent. The idea is to create a buffer for those times when the property is vacant.
Remortgaging to consolidate debt
If you have several debts, remortgaging could make them easier to manage.
You’d release the equity from your home and use it to pay off your debts. As a result, you’ll only have one payment to make each month.
As a plus, mortgage interest rates are at all-time lows. So paying off your debts this way could be cheaper than using a balance transfer credit card or debt consolidation loan.
That said, think carefully before going down this route. If you consolidate shorter-term debts like credit cards or loans to longer-term mortgage debt, you’ll pay more interest over the longer period of the mortgage - even though the interest rate might be lower.
Secured loans are less risky for lenders, which is why they’re normally cheaper than unsecured loans.
But they’re much more risky for you as a borrower because the lender can repossess your home if you don’t keep up repayments.
Struggling with debt? Speak to Stepchange or the Citizens’ Advice Bureau for free impartial advice.
Remortgaging for flexibility
Remortgaging isn’t only about paying less or raising capital. More simply, you might want to find a deal that better suits your lifestyle and changing financial circumstances.
Saved up a sum of money?
You could switch to an offset mortgage and pay less interest.
Offset mortgages are linked to a savings account you might have, and means you’ll only pay interest on the remaining mortgage balance after the savings have been deducted.
Let’s say you have £10,000 in savings and you want to take out a £100,000 mortgage. With an offset mortgage, you’ll only need to pay interest on £90,000.
If your lender charged you 2% interest on the mortgage, you’d pay £200 less per year than if you took out a regular mortgage offering the same interest rate.
Your savings aren’t used to pay off the mortgage, so they’ll still be there once your mortgage is fully paid off.
Thinking of quitting your job to start your own business?
Switching to a mortgage that allows underpayments or payment holidays (periods where you stop repayments) can make things easier.
Received a promotion and can afford to pay off your mortgage sooner?
Some lenders allow you to pay up to 10% on top of your regular monthly repayments. Doing so will reduce the outstanding mortgage balance, and therefore the interest that would have been due on it too.
You could also simply pay off your remaining mortgage balance, also saving interest.
However, some lenders penalise overpayments and early repayment. If your current lender is one of them, you could switch to a deal that’ll let you do it for free. This could also incur fees, so you’ll need to weigh up whether it’s worth doing so.