What are remortgages exactly?

Remortgaging can mean different things to different people. Typically though it is about replacing one mortgage with another:
• if you need to raise capital and own a property, then remortgaging may be an option for you;
• where you simply want to switch to a different deal in a bid to save money on your monthly repayments.

Here we look at remortgaging in order raise capital.

Equity

If your house is worth more than you owe on it (typically a case of your mortgage being less that the property’s market value) then you have what’s called equity or positive equity in it.

So, if you have a mortgage debt of say £80,000 and your house is worth £130,000 then you have equity of £50,000 (providing you have no other credit, such as a secured loan, attached to your home).

You may be able, therefore, to borrow a sum of money and use your property as security for it. That’s called remortgaging.

Theoretically you may be able to borrow up to the £50,000 equity but as lenders typically seek to retain a margin of error, you may find that you can borrow up a percentage of it for remortgages.

Remember though – if you’re unable to repay that loan then your property may be at risk.

Negative equity

This describes a situation where the reverse is true.

Let’s imagine a hopefully unlikely situation where you’ve a £100,000 mortgage on your property and its market value has declined to £90,000.

That’s called negative equity – and in that situation you may find it difficult or even impossible to secure any loan against your property.

In such a situation, remortgages may simply not be available to you and you may need to find an alternative way of raising your required capital.

The remortgage

Why would you wish to remortgage?

This term may sometimes be used to mean a number of very different things. Most correctly, it should be used to describe the process of switching your mortgage from one provider to another or, possibly, to another mortgage product.

There could be many reasons for you wishing to do so including finding a more attractively-priced mortgage elsewhere, wishing to change the term of your existing mortgage to stretch it over a longer period or simply to raise a little capital.

This is all typically possible but you may need to do your sums.

That’s because if you redeem your mortgage early, the original mortgage provider may have the right to make certain charges.

In terms of some aspects of this, particularly if you wish to somehow take capital out of the process, you may need to take into account the value of your property.

It typically works like this:

• if you have a property, it has a theoretical market value (its actual sale value may be very different);
• if you have an outstanding mortgage on the property, then the market value minus the outstanding mortgage is called the equity;
• if you have a large positive equity (i.e. your house is worth a lot more than you owe on it) you may be able to obtain a flexible remortgage that includes equity release;
• if you have negative equity, that basically means that you owe more on your property than it’s theoretically worth – as a result you may find it impossible to make changes that free up capital.

At one time in the UK, remortgages were uncommon and even frowned upon.

Those days are now long gone and many providers have products and services that may help.

In fact, your existing current mortgage provider may be very willing to discuss the options with you directly.

The remortgage, when used sensibly and taking into account your total financial position, may be a very useful facility to have at your disposal. It might be worth looking into in a little more detail.

Remortgages and how you can play less for your home

Signing up for a mortgage is a huge commitment. It may also be one of the largest and longest-lasting agreements you will make in your life. When you sign a mortgage, you usually make an agreement with a creditor to borrow money and to pay it back to them over a matter of years. If interest rates are high when you sign up for your mortgage, you may pay high interest rates for the duration of your mortgage agreement unless you have a variable interest rate or your remortgage the house. High interest rates can add thousands of pounds to the original cost of your house. Remortgages allow you to renegotiate a mortgage deal that is more beneficial than the one you have.

There are times when it may be beneficial to remortgage a home and it is important for homeowners to know when that is. If interest rates have dropped considerably since the time that you first bought your house and entered into your mortgage agreement, you could save money by remortgaging your home. If you are making very high mortgage payments and have an excellent credit rating then you could take a strategic look at your mortgage to see whether you could arrange a better deal for yourself through the benefits that remortgages offer. Taking advantage of lower interest rates could literally save you thousands of pounds in the long run.

There are times when homeowners choose remortgages to borrow more money than is owed on their house. They do this so that they can use the extra money just as they would a loan from the bank. They choose remortgaging for many reasons, most of these related to simplifying their finances and maintain just a single loan. This type of remortgaging lets the owner use the money for things such as a holiday for the family, adding an extension to the house, paying for a large item such as a car and more.

The first step towards remortgages and taking advantage of other mortgage options is seeing whether you qualify. You should be able to get a remortgage at any bank or building society that offers mortgages as they will usually also provide remortgaging. It is important to remortgage your home when interest rates are low otherwise you might not see the types of benefits that you are hoping for. Once you have applied for a new mortgage, which is what in essence you are doing, you will need to wait to see whether or not you have been approved. If you are turned down by one company, it is not the last of your chances. A financial adviser may be able to help and match you to the right deal as most lending companies use a slightly different formula to qualify customers for loans, and the adviser should know the right company to approach. .

Remortgages explained

Most people find that the single biggest expense of their life is a mortgage. After all it is a giant loan taken out to buy a house, which involves borrowing, say, £100,000. Some people wrongly believe that once you are on a mortgage it’s impossible to change it, but the reality is you are free to switch to remortgages supplied by different providers if you feel you are losing out with your current deal. A few simple adjustments can even make someone over £100 a month better off.

Remortgages can be quite difficult to understand however, and this can put some people off researching the process properly. But to give an example if someone has a repayment mortgage of £100,000 pounds and is paying six per cent interest, switching halfway through a 25 year deal to a five per cent interest mortgage could save somebody a tidy sum of money. There is also nothing to stop someone switching more frequently, perhaps even every two or three years.

Not only can remortgages save you money they can also help to raise cash if your house has risen in value. Jumps in prices in the last decade mean people’s houses are still worth more than what they paid for them. So, remortgaging essentially involves putting the difference in your pocket.

Remortgaging can also be used by people whose circumstances have improved. Someone might be on a much better salary that when they took out the home loan, or may have inherited a large amount of cash. Maybe they want to increase their repayments but their current deal does not allow them to. Changing to a new home loan may help them do this.

A catch with remortgaging is that you will probably have to pay costs when you break off from your loan provider. Remember it is important to work out your figures and to make sure your new deal you will end up saving you more than you spend on changing it, otherwise there’s no point in the switch. In simple terms you are likely to have to pay a first fee to leave your existing provider, and also a fee for joining the new one.

Those on certain deals will have to pay early repayment charges, and may also have to pay a kind of release charge or mortgage exit administration fee. These are designed to cover administration costs, and have come under some scrutiny from the Financial Services Authority (FSA) - remember to check that what you are quoted to leave is the same as in the small print of your original mortgage wording.

Finally the arrangement fee for your new provider can vary from a few hundred pounds up to over £1,000. Some will let you incorporate the charges into the home loan, but remember this will also incur interest. Another thing to look out for with remortgages is whether or not your new provider will be prepared to pay your legal fees, which will apply even if someone doesn’t want to move house when setting up new product.

Finding a good remortgage

Finding a good remortgage is a question of finding a new mortgage that suits you better than your existing mortgage. This might be a question of a desire for greater flexibility in the way you manage your mortgage, it might follow moving home, it might be needed because an existing mortgage repayment term is coming to an end, or – for many homeowners – will be a question of optimising the cost of the mortgage repayments each month.

The one big problem – as anyone with even half an eye on the financial pages of the press can tell you – is the dire shortage of funds available to the mortgage market these days. Combined with the rapid slowing down of the housing market generally, this has made life for first-time buyers especially difficult. Indeed, the Council of Mortgage Lenders reported – in the Daily Telegraph newspaper on the 15th of January 2009, for example – that only 12,400 loans were advanced to first-time buyers during the whole of the month of November, the lowest total since the Council began assembling such figures in 2002, and 57% down on the same month the previous year.

Relatively speaking, those more interested in finding a good remortgage are rather better off. The Council of Mortgage Lenders also reported that 52,000 remortgages – worth a total of £7 billion – were advanced to borrowers during November 2008, although this was admittedly 25% less in terms of both volume and value than in October.

The overall shortage of funds available for mortgage lending may in fact be favouring applicants for remortgages since these borrowers represent a known risk to the lender. There is a history of regular repayments, made on time, and, in the case of those who have owned their property for a number of years, likely to be a relatively comfortable equity stake in the property. Remortgages, therefore, offer a relatively good risk for the nervous and cautious lending market.

Borrowers like these, in the market for finding a good remortgage, have a number of options. If they are coming to the end of a fixed rate term, their mortgage is likely to revert to the lender’s standard variable rate by default. Following the recent drastic reductions in the Bank of England base rate – to it’s lowest ever of just 1.5% – standard variable rates of even the cash-strapped mortgage lenders have had to reflect at least some of this reduction. Standard variable rates, therefore, might actually represent a more attractive move now than in the past for some borrowers.

Yet others, who have witnessed successive reductions in the base lending rate and who anticipate the possibility of still further reductions might prefer a tracker mortgage, with an interest rate fluctuating in line with the base rate itself. When looking for a tracker mortgage, however, borrowers should be aware that some will have written into them a “collar” which effectively prevents the mortgage interest rate falling below a certain minimum. In this event, the borrower might not get to enjoy the full benefits of a reduction in base rates below a certain minimum rate.

Finding a good remortgage for some borrowers might also be seen as an opportunity to swap a relatively inflexible mortgage for one that offers the chance of varying the monthly repayments – by increasing the repayments made or reducing them at other times – within certain limits, according to fluctuating personal circumstances. For such borrowers, a flexible mortgage could prove attractive.