Remortgaging your home: how it works and what you need to know

Thinking about whether to remortgage? You’re not alone.

Just under half a million UK homeowners remortgaged £83 billion of loans during the 12 months to February 2019.(1)

But despite this, around two million homeowners are still collectively overpaying £10 billion a year by being on the wrong mortgage deal.(2)

Bear in mind

  • Your home could be repossessed if you don't keep up repayments on your mortgage.
  • You may have to pay an early repayment charge to your existing lender if you remortgage.
  • Any savings will vary depending on personal circumstances.

So how can you ensure you’re on the right deal? This guide will help you understand the ins-and-outs of remortgaging so you never pay more than you should.

But remortgaging isn’t only about saving money. Depending on your situation, there could be many other reasons for doing it.

What is remortgaging?

Remortgaging means swapping your current mortgage for another one. You can remortgage with your current lender (a ‘product transfer’) or move to a different one. Either way, your new lender will pay off your old mortgage. And you’ll start repaying the new one.

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.

Bear in mind
Your home could be repossessed if you don't keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Any savings will vary depending on personal circumstances.

When should you remortgage?

While there are good reasons to remortgage, it’s not the right move for everyone. Here are three things to consider before you decide:

  • What stage are you at on your current mortgage?
  • How much have you got left to pay?
  • Have your circumstances changed?

What stage are you at on your current mortgage?

If you’re still within the initial period (the first two years, for example) you may have to pay an early repayment charge to remortgage. But if you wait too long, you may be moved to the SVR before your new mortgage is in place.

As a rule, you should start looking for a new mortgage about six months before your initial term ends. Our free mortgage monitoring service can alert you when it’s time.

How much have you got left to pay?

Remortgaging isn’t only about lowering your interest rate. Your new mortgage may have fees attached. And if you switch to a new lender, you may need to hire a solicitor.

If you don’t have much left to pay on your mortgage, these costs may cancel out any savings you stand to make. Besides, some banks won’t let you remortgage if you have less than £25,000 left to repay.

Have your circumstances changed?

When you remortgage, you switch one mortgage for another. Sometimes this can be done with your existing lender, which is called a ‘product transfer’.

You’ll have to submit an application and documents to prove your income, like you did the first time. The lender will also carry out credit checks and an affordability assessment.

If your financial situation has changed - because your income has decreased, for example - you might not be able to get a better deal.

Do you have a bad credit history?

Lenders look at your credit history to find out how you’ve handled debt in the past. This tells them how much of a risk there is of you not keeping up with repayments.

If you’ve had trouble paying your debts or have a low credit score for other reasons, remortgaging will be trickier. It’s also unlikely that you’ll get the best deal available. That said, you may still be able to find a remortgage deal.

Here’s what you can do to give yourself the best chance possible:

1. Check your credit report for any mistakes that could be harming your score
For instance, your report might state you missed a payment when you actually paid. You can also add a note to your credit file if you had a good reason for missed payments, for example because you lost your job.

You can access your credit report for free using Experian or Equifax.

2. Take charge of improving your credit score
Steps you can take include getting on the electoral roll (if you’re not on it already), paying your bills on time, and avoiding using more than 50% of your credit limit.

Here are more tips on improving your credit score.

3. Stop applying for credit
If you apply and get rejected, this will leave a mark on your credit report, which may worsen your score. Instead, explain your situation to your bank or a mortgage broker. They’ll be able to advise you on your chances of getting accepted.

Trussle looks at mortgages from more than 90 lenders, so we may be able to find a mortgage you could qualify for even if your credit history is less than perfect.

4. If your chances aren’t looking good, it may be best to wait things out
Missed payments, defaults, and other issues that harm your credit score stay on your report for six years. If you’re close to the end of this period, it might be worth waiting for them to be removed from your report.

In the meantime, you could work on improving your score to give yourself the best chance of finding a suitable remortgage deal.

How much does remortgaging cost?

Alongside the early repayment charge - the fee your current lender might charge for paying off your mortgage early - there are also other fees to take into account. These include:

  • Your new lender’s mortgage fees
  • A valuation fee
  • Conveyancing fees
  • Deeds release fees
  • Broker fees (some brokers, like Trussle, don’t charge a fee)

Your new lender’s mortgage fees

Your new lender may charge you:

  • An arrangement fee, also known as the product fee. This covers the administrative cost of setting up your new mortgage.
  • A booking fee, also known as a reservation fee or application fee. This is usually around £100 to £200. You’ll need to pay this when you apply. You won’t be able to claim it back if your mortgage doesn’t go ahead.
  • Both.

As a rule, a higher arrangement fee means you’ll get a lower interest rate. By contrast, a lower arrangement fee means a higher interest rate.

If you have a large mortgage, it may be worth going for a higher arrangement fee in exchange for a lower interest rate. But if your mortgage is for a smaller amount, a lower arrangement fee and higher interest rate may work out cheaper in the long run.

You can also choose whether to pay the loan repayment fee upfront or add it to your monthly payments. Keep in mind that if you add it to your monthly payments, you’ll be charged interest on it.

In either case, you’ll want to compare mortgages against each taking into account the interest rate, fees, and incentives.

Read our guide on comparing deals by True Cost.

Valuation fee

Your lender can sell off your home to get their money back if you miss repayments. For this reason, they’ll want to know how much your home is worth.

The valuation fee can cost around £300, but many lenders will waive it on remortgage deals. It doesn’t hurt to ask.

Conveyancing fees

This is the cost of your solicitor.

If you remortgage with your current lender, they may offer you a solicitor’s services free of charge. A new lender may also offer to pay for your solicitor to entice you away from your current lender.

Broker’s fees

Some brokers will charge a fee for their advice. This can be a fixed fee or even a percentage of the loan.

In most cases, you’ll only have to pay this if you apply for a mortgage with one of the lenders they suggest. That said, it’s best to check beforehand. Trussle doesn’t charge you any fees.

Deeds release fees

Your current lender may charge a fee to release your property title deeds to your new lender.

The amount should have been made clear in your mortgage offer document. It’s worth checking to make sure you’re not being overcharged.

How do you remortgage?

There are three main steps to remortgage your home:

  • Step 1: Decide whether remortgaging is right for you
  • Step 2: Shop around
  • Step 3: Wait for the process to complete

Step 1: To remortgage or not to remortgage?

First things first, make sure remortgaging is right for you. In particular:

  • Go through your current mortgage’s terms and conditions. Tot up the fees you’ll have to pay and consider whether switching would be financially worthwhile.
  • Check your credit score, incomings, and outgoings to find out your chances of getting accepted and how much you could afford to borrow. Our free mortgage affordability calculator can help.
  • Look up what homes in your area are selling for on Rightmove or Zoopla. Your lender might want to make their own valuation, but this will give you a good idea of how much equity you have in your home.
  • Research different types of mortgages and decide what kind you want. This will depend on why you want to remortgage. If you want to fix your repayments, for instance, a fixed-term mortgage is probably your best bet.

Step 2: When and where do I remortgage?

You should start looking for a new mortgage deal about six months before the initial term on your current mortgage ends.

You can find remortgage deals by:

  • Asking your current lender
  • Using a comparison website
  • Speaking to a mortgage broker

Your current lender is a good place to start. They’ll be keen to keep you as a customer so they might waive some fees. Plus, you won’t usually need to hire a solicitor, which saves money.

Alternatively, comparison sites can give you a good overview of what’s available. Once you pick a deal, you’ll either be redirected to a mortgage broker to make sure it really is the right deal for you, or they may direct you to the lender’s website so you can apply directly.

Mortgage brokers are mortgage advisors and provide access to a wide range of deals. They know the market well and will take the time to understand your needs so they can find the right deal for you. This is especially helpful if you have issues such as bad credit.

Trussle has access to 90 lenders, but some brokers only consider a much more limited number of lenders. And some lenders, like First Direct, don’t offer mortgages through brokers. So, you may be able to secure a more competitive deal if you spend the time to hunt around.

Whether you speak to your bank, use a comparison site, or a mortgage broker, here are some things to consider when comparing deals:

Loan-to-value
The deals you’ll be offered will partly depend on your loan-to-value - that’s the percentage of your home the lender is going to pay. Most lenders won’t pay more than 90% of your home’s value.

Fixed vs variable rate
You can fix an interest rate for 2, 3, 5, or even 10 years. What you opt for depends on your circumstances.

As a rule, you have to pay an early repayment fee if you pay off your mortgage during the fixed-term period. So if you’re planning on selling your home soon, a shorter fixed term or a variable rate may be the better option.

If you’re going to live in your home for a while, a longer fixed term will give you the security that your repayment won’t change. Bear in mind though, that longer fixed term mortgages usually have higher interest rates.

Fees
It’s not all about the interest rate. The arrangement fee in particular (but also other fees) can quickly make what looks like an attractive deal more expensive. Check the terms and conditions carefully before you decide.

Step 3: How long does it take to remortgage?

Remortgaging can take between one to eight weeks, depending on your circumstances. It’ll usually take longer (around four to eight weeks) if you switch to a new lender, because the process will be more involved.

Your new lender will:

  • Pay off your current mortgage
  • Set up your new one
  • Get your property’s title deed

On your remortgage completion day, your new mortgage kicks in. You’ll start making repayments each month on the day you’ve agreed with your lender.

Ready to remortgage? Trussle can help

Forget reams of complicated paperwork and hours waiting around in drab offices.

At Trussle, we can help you remortgage with a few taps on your phone - whether you’re on your lunch break, on the train, or kicking back on your sofa.

Get the whole picture

Create a profile in less than 15 minutes and we’ll search over 11,000 mortgages from 90 lenders to find the most suitable mortgage deal for you. We’ll then manage your application and keep you informed at every step of the way.

Save money

We don’t believe you should pay fees to get mortgage advice. Unlike many other brokers, Trussle is 100% free to use - from initial website signup to mortgage completion.

Never miss a more suitable deal

We won’t encourage you to switch if your current mortgage is still your best option. But we’ll monitor the market for you on a daily basis and let you know as soon as a more suitable deal is available.

Bear in mind
Your home could be repossessed if you don't keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Any savings will vary depending on personal circumstances.

Sources
(1) ukfinance.org.uk/data-and-research/data/mortgages/lending-trends
(2) trussle.com/blog/post/mortgage-saver-review-feb-2018
(3) trussle.com/blog/post/homeowners-stung-for-failing-to-switch-svr
(4) thisismoney.co.uk/money/news/article-1607881/When-UK-rates-rise.html
(5) landlordtoday.co.uk/breaking-news/2019/4/rents-in-london-hit-record-high-as-number-of-homes-continues-to-decline