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Is remortgaging a good idea?
What is remortgaging
Is remortgaing a good idea? This is one of the questions lenders and mortgage advisors are asked most frequently. Inevitably the answer is, ‘It can be. But it isn’t always”. Whether you should or should not remortgage always depends on your specific circumstances.
Remortgaging simply means taking out a new mortgage on your property and using the funds from this to immediately and automatically pay off your previous mortgage. The most common reason for doing it is to save money. Mortgage rates change regularly, and you may find better deals available than the one you have currently.
Alongside this, fixed-rate mortgages come to an end (usually after 2-5 years), at which point a lender will switch you automatically to their ‘standard variable rate’. As this may make your monthly payments significantly higher, remortgaging onto a new ‘fixed rate’ may allow you to get back to a rate similar to, or better than, you had previously.
Remortgaging is usually not the only option available to you, however, particularly when considering how best to borrow additional money to finance improvements to your property. (Second charge mortgages, for example, add a further loan alongside your existing one.)
What’s best for you always depends on your situation. So let’s try to answer some of the questions you should ask.
Reasons to consider remortgaging
There are lots of reasons to remortgage. The most obvious is that by doing so you may well be able to save yourself a good deal of money each month! But whether you eventually decide to remortgage or not, it’s always smart to keep an eye on any aspect of your finances and outgoings.
Your mortgage deal is coming to an end
If you signed up for a fixed rate mortgage when you bought your home, or have previously remortgaged to a fixed rate deal, then the term of that deal will come to an end. Fixed rate mortgages are usually fixed for between 2 and 5 years, though this can be as little as 1 year. When the fixed term ends, your lender will switch you to their ‘standard variable rate’, and leave you on that rate until or unless you remortgage with them to a new fixed rate deal, or leave them to remortgage to a fixed rate deal with another lender. The difference in monthly cost between the fixed rate you had got used to and the standard variable rate can be substantial so, in most cases, remortgaging to a new fixed rate will be worth considering.
- You have built up more equity in your property
Should you remortgage because you’ve built up more equity in your property? If the value of your property has gone up since you took out your current mortgage, or if you’ve been paying more than you needed to each month and so have reduced your original borrowing, you should effectively own a bigger portion of the property than you did previously (assuming that the value of the property has not dropped). Maybe you needed to borrow 85% of the value of the property originally, but now that you have overpaid each month and/or the value of the property has gone up, the sum you need to borrow is only equal to 75% of your property’s value. That’s great, because the lower percentage of the loan you need to the value of the property, the lower the mortgage rates that you’ll be offered if you remortgage.
Watch out though. If your remortgage depends on a new valuation, you may have to pay a fee to the lender for that valuation and this will cancel out some of the benefit of the lower rate.
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