Explained: How remortgaging works and why it’s important

Remortgaging is a task most homeowners will do at some point. Yet, it can seem complex or something that isn’t that important. Read on to learn how remortgaging works and why it could save you money.

When taking out a mortgage, you’ll choose the term length, the length over which you repay the loan. First-time buyers traditionally opt for a 25-year term, but it’s possible to repay a mortgage over 40 years in some cases.

However, the interest rate you’re offered won’t usually last for the full term of the mortgage. Instead, the deal will expire after a defined period, most commonly two, three, or five years.

When your mortgage deal expires, you can remortgage without paying an early repayment charge (ERC) either with your current lender or a new one. One of the main reasons homeowners remortgage is to save money.

Remortgaging could save you thousands of pounds over the full mortgage term

Typically, when your mortgage deal expires, you’ll move on to your lender’s standard variable rate (SVR). If you continued to make repayments, you’d still pay off the mortgage at the end of the term.

However, the SVR isn’t normally competitive, so it could mean you’re paying far more in interest.

As you often borrow large sums over an extended period through a mortgage, even a small difference in the interest rate could mean you save thousands of pounds.

Imagine you’ve borrowed £250,000 through a repayment mortgage and you have 20 years remaining on the term. If your lender’s SVR is 6%:

• Your monthly repayment would be £1,791
• Over the full mortgage term, you’d pay almost £180,000 in interest.

Now, if you search for a new mortgage deal when your previous one expires and secure an interest rate of 4%:

• Your monthly repayment would fall to £1,514
• Over the full mortgage term, you’d pay around £113,500 in interest.

So, in this scenario, taking the time to remortgage would save you more than £65,000.

While your interest rate is likely to change several more times throughout the remaining 20-year mortgage term, the figures illustrate the power of remortgaging. Paying less interest could help you become mortgage-free sooner or allow you to pursue other goals.

3 more practical reasons to remortgage

Saving money isn’t the only reason to remortgage. Here are three more reasons to check when your current deal expires and prepare to find a new deal.

1. You may choose to fix the interest rate

As the name suggests, the interest rate if you’re paying the SVR is variable. This means it could rise or fall, which would affect your repayments.

When you remortgage, you might also want to consider whether a fixed-rate mortgage is the right option for you. This would mean the interest rate you pay is fixed for the duration of the mortgage deal, which can be useful for budgeting.

2. You can change your mortgage term

Remortgaging is an excellent opportunity to assess if the mortgage term is still right for you.

If you want, you can shorten the term, which would mean you repay the debt sooner. Alternatively, if you want to reduce your outgoings, you might extend the term. Keep in mind that repaying over a longer term usually means paying more interest overall.

3. You might be able to release equity from your home

As you make mortgage repayments or the value of your property rises, you build up equity in your home. Depending on your circumstances, you might be able to release some of this equity to fund a renovation project, consolidate debt, or cover other expenses.

While this can be a tempting option, this increases the amount you borrow, meaning higher repayments and more interest over time.

You’ll usually need to complete a mortgage application to access a new deal

The process for remortgaging is similar to taking out a mortgage for the first time.

Comparing lenders can help you secure a competitive interest rate. As a mortgage adviser, we can help you assess the options and which lenders are likely to approve your application.

Usually, you’ll need to apply for a mortgage, including proving that the repayments are affordable. Again, we can lend support here when you’re completing the paperwork to ensure the process is as smooth as possible.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.