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Remortgage guide
Remortgages: Why remortgage guide

Why remortgage?

When choosing to remortgage it is important to look at the deals on the market and the reasons you are remortgaging – be it to raise cash for home improvement or cut monthly repayments.

There are four main reasons why people remortgage:

  • End of a fixed-rate deal
  • Change in circumstances
  • Looking to raise cash
  • Home improvement


    Remortgaging: End of a fixed-rate mortgage deal

    Over 2008 some 1.4 million short-term fixed-rate mortgages will end.

    Interest rate increases during 2007 mean homeowners coming off fixed-rate deals are facing higher repayments than expected when the mortgage reverts to the lender's standard variable rate (SVR), which is already over the interest rate charged on a fixed rate deal.

    Despite interest rates now starting to fall, without remortgaging homeowners are liable to face a payment shock when switching to a lender's SVR.

    When switching to a deal there are lots of factors, and costs, to keep in mind.

    During the fixed rate period an early repayment charge (ERC) will stand if you want to switch to a new lender and it is important to check when the ERC stops applying.

    With longer-term mortgages – over five, ten or even 25 years – the ERC is reduced the longer you have a mortgage for, while for short-term fixed rate mortgages the ERCs stop applying once the initial deal runs out and the mortgage switches to the lenders standard variable rate.



    Change in circumstances

    Finding you can now pay more or less often leads homeowners to remortgage.

    A promotion, new job or inheritance can all mean you can afford to pay more off your mortgage. However, there are a number of options to weigh up before handing over the cash.

    Remortgaging may not be necessary in some cases, as many mortgage deals allow a degree of overpayment each year without any penalty. However, by paying too much you could face early repayment charges (ERCs) .

    Another option would be to invest any windfall instead of paying off the mortgage – but this is only worthwhile if the interest earned after tax is greater than any interest paid on the mortgage.

    If you find you can no longer meet your monthly repayments, remortgaging to a new deal could be an option.

    By extending the term of the mortgage a borrower pays more in the long term – but monthly repayments can be cut.

    However, if you are facing troubles meeting monthly mortgage repayments because of debt it is important to make sure you take on any underlying spending troubles you have and change your ways to ensure further debt is not built up.

    Taking time out to travel, a lower paid but more rewarding job or relationship breakdown can all mean you find you have less cash available.


    Looking for raise cash

    House prices have more than trebled in the last ten years, according to Nationwide.

    With this high house price growth some people are keen to use the increased value their homes have built up and release some of the equity. The extra value in the home could be used for a number of reasons.

    Raising cash through remortgaging has a number of implications. You have to be in a position where you are ready to continue paying your mortgage for a number of years, when many would be silently preparing for the day they are free from their mortgages.

    Remortgaging can be a way of raising cash towards a new property, either in the UK or abroad, helping a child build up a deposit for their own home, or starting a business.

    The variety of new mortgage products now on the market also means it could be a chance to opt for a new deal where repayments won't necessarily leap up with the increased amount borrowed.


    Home improvement

    Remortgaging to start home improvements is a way of borrowing to invest more in your biggest asset: your home.

    Often an extra bedroom, improved kitchen or new home office will add value to your property as well as provide you with the extra space needed without moving.

    It is important not to be swept away with over grand plans for a convert loft or extension and to weigh up the costs and benefits.

    Look around your local area to see how much a property with your planned improvements costs compared with your current home and the cost of the improvements – or ask a local estate agent about the how much the works will boost your property price.

    Get a builder to give you a quote on work and if you are spending more on improvements than it increases the property value, it may not be worth going ahead or perhaps moving up the property ladder could be an option.

    However, some people do go ahead with projects despite the initial costs outweighing any benefits, valuing home improvements in more than just pure financial terms.


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