Should I Remortgage?
Lowering mortgage payments, consolidating debt, and using a home’s equity are all viable reasons for remortgaging a home. While remortgaging may seem very attractive in theory, the borrower must consider all aspects of the process before committing to a new loan.
If interest rates have declined since you secured your original mortgage, you can very well lower your monthly mortgage payments through remortgaging. Keep in mind, though, that securing a remortgage loan comes with its own costs. The new loan will likely have fees and charges associated with it. Your current mortgage may also carry an early redemption charge, or ERC, especially if you have a fixed rate or discount mortgage. ERC’s are also known as early repayment charges. This charge is applied if you pay your mortgage in full before the end of the agreed upon term of the mortgage. An ERC may be equal to several months’ interest on your loan, which can be quite costly. If your remortgage loan is taken out with a different lender than your original lender, you will typically be charged an exit fee.
Some borrowers have remortgaged their homes for home improvements, debt consolidation, or family holidays. While these were once valid reasons for remortgaging, the higher housing costs and increasing interest rates of today make this a less attractive option for most borrowers. Remortgaging for these reasons should be approached with caution.
Borrowers with bad credit records usually obtain sub-prime mortgages. Since bad credit ratings indicate a higher risk for the lending institution, higher interest rates are imposed on the borrower as insurance for the lender in case the mortgage loan cannot be repaid. If, however, the borrower consistently makes timely mortgage payments, there is a greater chance that a remortgaged loan at a lower interest rate will be a definite possibility for the borrower.
In past years, borrowers were able to obtain remortgage loans for an amount greater than the actual value of their house. The loan amount is compared to the value of the property, resulting in a percentage known as the loan-to-value, or LTV. LTV’s of 125% were not uncommon in past years, but in today’s economic situation, most lenders will only lend up to 95% of the property’s value. In general, lenders are stricter about loans now, and it is more difficult for the consumer to be approved for even standard loans.
Many borrowers remortgage their homes through the original lender. This is usually the most uncomplicated route to take, and it is quite possible that your lender will call you when your current mortgage term is close to ending. There are usually several remortgaging options available, and your lender can explain all of them to you and answer any questions you have. You are not obligated to retain the services of your current lender, however, and you are free to research any of the numerous lenders that offer home remortgaging services.
A mortgage broker might be the right solution if you desire professional guidance in your choice of a remortgage loan. Mortgage brokers in the UK are regulated by the Financial Services Authority and are required to give each customer useful and fair advice. Some mortgage brokers charge for this service, so make sure you ask about fees when you first contact your chosen broker.
There are advantages and disadvantages of any remortgage loan, and you need to ensure that the option you choose fits your circumstances. It may benefit you to begin your research by reviewing financial publications, books and Web sites. Ask your lender or broker to fully explain all the available choices. Prepare a list of questions before, during and after your session so that you can have a solid understanding of what to expect from your remortgage loan. Any type of mortgage loan is a large commitment, and you can never learn too much before making your final decision.
Your lender should be upfront with you about your remortgage loan’s interest rate. Most remortgage loan borrowers hope to acquire an interest rate that is lower than the rate on their original mortgage. This will not always be possible, and it is best to have this information at the beginning of the loan search, especially if the intended goal is a decreased interest rate. If you are interested in a fixed rate or capped rate loan, be sure to find out how long the stated interest rate will be in effect.
A fixed rate, capped rate, or discount remortgage loan may convert to the lender’s standard variable rate (SVR) when the loan term ends. Make sure you understand exactly how the interest rate will be determined once the original loan term expires. Variable rates fluctuate over periods of time, and it is impossible to know what a lender’s SVR will be on a future date. You can, however, check the SVR’s of several lenders, including your own, to compare current rates.
For budgeting reasons, it is always a good idea to determine what your new remortgage loan monthly payment will be. Your lender will be able to calculate your new payment for you. If you do not increase your loan amount and the interest rate has decreased since you obtained your original mortgage, you can expect a lower monthly payment. An increased loan amount or a higher interest rate will result in a higher monthly payment. Before finalizing your remortgage loan, you should determine whether or not the loan payment will fit your current financial situation.
Arrangement fees are charges for the origination of a loan. Ask your lender if arrangement fees will be applied to your remortgage loan. Financial institutions sometimes entice borrowers by waiving arrangement fees, and it is possible that you will not be responsible for this added expense.
Your mortgage broker or lender can usually give you an estimate of the length of time it will take to complete your remortgage loan process. Keep in mind that, to be on the safe side, you should add in some extra time in case complications arise. If everything goes smoothly, you will be pleasantly surprised with an early completion.