A remortgage is the process of paying off one mortgage with the proceeds from a new mortgage using the same property as security. Often the purpose of switching is to secure a more favourable interest rate from a different lender. This is much easier to achieve with a whole of market mortgage broker than on your own.
The process of remortgaging does not usually involve moving house or taking out a second mortgage on the property; it is in effect the transfer of a mortgage from one lender to another. Homeowners may choose to remortgage for various reasons, usually to reduce the overall monthly mortgage payment amounts. However, other reasons may include to pay off a mortgage earlier, to raise capital, or to consolidate other more expensive short term debts.
Homeowners often misuse the expression remortgage when they are simply switching from one product to another with the same lender which is not strictly a remortgage. A remortgage involves the removal of one legal charge over a property and its substitution with another in favour of a new lender.
The ability to remortgage is very much based on an individual’s circumstances and as the costs involved can be very large it is always best to take advice from a suitably qualified individual.
The majority of remortgage rates track the Bank of England base rate. The base rate has been at historical lows since March 2009. Due to these record low rates many people with an existing mortgage may be able to remortgage their home from a higher rate onto a lower rate which can result in a saving on their monthly mortgage repayments. As with any large financial investment remortgaging should always be undertaken with appropriate advice from a suitably qualified professional. The timing of remortgaging is important particularly at a time of an imminent increase in base rates in the UK which will undoubtedly have the knock-on effect of increasing monthly repayments on homeowner mortgages that are not fixed.
Taking advice from a qualified expert offers you extra protection because if the mortgage turns out to be unsuitable, you can complain to the Financial Ombudsman Service (FOS).
If you choose to go down the ‘execution-only’ route (where you make decisions on your own without advice), there will be fewer circumstances where you can complain to the FOS.
Main reasons to consider a Remortgage
1 Remortgaging to get a better interest rate
When you take out a new mortgage, you normally get an introductory deal. For example, a low fixed or discounted rate or a low tracker rate for the first few years of your mortgage. Introductory deals normally last for between two and five years.
Once the deal ends you’ll probably be moved automatically onto your lender’s standard variable rate, which will usually be higher than other rates that you might be able to get elsewhere. So when your introductory period ends, take a look at the market to see if switching to a new mortgage deal will save you money. Bear in mind that if you only have a small outstanding mortgage the amount you stand to save might be too low to make switching worthwhile.
If you like the certainty of a fixed rate, for instance you may think rates will rise in future, you may wish to lock in a fixed rate to provide that level of certainty. This runs the risk of you paying more than you need if interest rates were to fall.
2 Remortgaging for more flexibility
Remortgaging might also enable you to get a more flexible deal – for example if you want to overpay. Or perhaps you want to switch to an offset or current account mortgage, where you use your savings to reduce the amount of interest you pay permanently or temporarily – and have the option to draw your savings back if you need them.
3 Remortgaging to consolidate debt
If you have a lot of debt, you might be tempted to borrow some extra money and use it to pay off your other debts. Even though interest rates on mortgages are normally lower than rates on personal loans – and much lower than credit cards – you might end up paying far more overall if the loan is over a longer term. So think carefully before using this option.
4 Raising a cash lump sum by releasing equity from your home
This lump sum may be for home improvements or for other purposes and is often referred to as “equity release”. Sometimes people without a mortgage in the first place may take out an equity release loan which is a specialist product not to be confused with remortgaging.
When it pays to switch and when it doesn’t
It is difficult to generalise because each circumstance will vary. Some mortgages are on fixed rate contracts that will revert to variable rate in the future and others are already on a variable rate. Whilst it is not possible to be certain what the variable rate will be in the future, fixing your rate when interest rates are low can provide more certainty.
If you change your mortgage before the end of your deal you might have to pay a fee called an ‘early repayment charge’. Mortgage related costs can vary greatly between providers and add to the cost of your repayments when added to the loan.
Some lenders might offer fee-free deals to tempt you to switch, but usually you will have legal, valuation and administration costs to pay.
If you are not using an adviser, you can use the Annual Percentage Rate of Charge (APRC) to help you compare deals. The APRC is a way of calculating interest rates that incorporates some mortgage-related fees in the calculation, giving you a way to compare mortgage deals.
What might look like a money saving deal could end up losing you money if you don’t do your sums correctly.
Reducing your loan-to-value to get a better rate
Every mortgage deal has a limit to how much you can borrow when compared with the current value of the property. This is shown as a percentage and is called the ‘loan-to-value’.
When you remortgage, the lower the loan-to-value you need, the more deals that might be available to you – and you might be able to get cheaper mortgage deals.
How to calculate your loan-to-value
- Divide your outstanding mortgage amount by your property’s current value.
- Multiply the result by 100.
- Your outstanding mortgage is £200,000.
- Your lender thinks your property is worth £250,000.
- 200,000 divided by 250,000 = 0.80.
- 0.80 x 100 = 80 – so your loan-to-value is 80%.
Your lender’s valuation
Bear in mind that when you apply for a mortgage, the lender’s valuation might involve just checking the outside of the property from the street.
If you think the valuation is much too low – and that you’re losing out on a better rate as a result – ask the lender to reconsider.
To support your case, you could provide evidence of the sale price of a few similar properties in your area and, if relevant, list the cost of any expensive home improvements you’ve carried out.
If you go for an independent valuation there will be associated fees and costs.
Banks and Building Societies will require the use of a conveyancing specialist whereas some other lenders may be more relaxed.
Requesting the Title Deeds and a Redemption Statement
The first thing you need to do is to write to the current mortgage lender and request that they forward to you both the title deed and a redemption statement. You should indicate that the redemption statement is for budgeting purposes only and is not final. Obtaining a statement at this stage will allow you to check that the new mortgage advance is going to be enough to actually complete the remortgage. Lenders will often add a fee for producing a redemption statement and a deeds production fee to the mortgage balance. Clients will occasionally misjudge what they owe or what the costs are likely to be and this step ensures no mistakes are made.
Obtaining Official Copies of the Client’s Title
The next stage in the remortgage conveyancing process is to obtain copies of the registers of title for the property (“Official Copies”) from the Land Registry. If you do not have an account set up with them then you will need to go to the land registry forms and publications area and complete and print the form OC1. To find out which land registry office to send the form to, visit the land registry office finder page online. When completing form OC1 you do not need to fill in boxes 1 and 2, nor do you need to put the OS map reference in box 3. There is a small fee to be paid and up to date information can be found in the land registry fees ready reference guide. You must complete your address details in box 5 (key number can be left blank). In 7 tick the box for the freehold estate or leasehold estate (depending on whether the property is freehold or leasehold), in 8 tick the first box indicating that you require a back dated Official Copy and in 9 tick the first 2 boxes to request a copy of the register and plan.
Checking the Title
When acting in a remortgage some take the view that it is not necessary to perform as in depth a title check as you would if acting for a purchaser since you are only required to check that the property is a good security for the mortgage loan. Some remortgage conveyancing checks have become much too basic. If a lender has to repossess, it will be selling to an individual whose conveyancer will perform a thorough check and will expect any defects to be corrected, and not to another lender. There are certain matters that a lender is unlikely to be interested in such as changes to the area that don’t affect the value of the property or noisy neighbours, and they will often not require searches, but corner cutting should be kept to a minimum; see “Searches” below.
Checking the Official Copies
For registered land the official copies should give full details of the legal title to the property. If you are not familiar with Title Deeds it pays to use an adviser who is.
If the property is leasehold, you’ll need to check the lease and you’ll need to raise certain enquiries with the landlord/managing agent to check such things as whether the service charges and rent are paid up to date, who you need to serve notice of charge on etc. The lease should be with the title deeds, if it is not, an official copy will need to be requested from the land registry.
Most lenders will not require searches to be carried out for a remortgage, though you will need to check part 2 of the CML Handbook for the particular lender. Where searches are not required, it will be necessary to obtain “no search indemnity insurance”.
Checking the Mortgage Offer
The lender will issue at least 2 copies of the mortgage, one to the borrower and another to the conveyancer. The conveyancer’s copy should incorporate the lender’s instructions to the conveyancer to act on its behalf in the remortgage. It should also include the mortgage deeds and any other necessary legal documents.
The mortgage offer will state how much the purchaser is borrowing, and how much the conveyancer will actually receive (though this is not always completely clear and care should be taken).
Preparing for Completion
Once the official copies and, if applicable, lease and searches have been checked and any problems or defects have been reported to the mortgage lender and they have confirmed they are happy to proceed, you are ready to arrange completion (subject of course to the borrower’s instructions). In order to complete you will need to do three things:
- Request a final redemption statement
- Carry out final searches
- Request the mortgage advance
Requesting a Final Redemption Statement
On completion you’ll obviously need to repay the borrower’s existing mortgage. Although you should already have a provisional redemption you should still obtain a final one calculated to the completion date, even if the one you have appears still to be in date. Some lenders will not add all of the costs to a provisional figure and also, the borrower may have made (or missed) a payment in the meantime.
Carrying Out Final Searches
Prior to completion, and prior to requesting the mortgage advance, you will need to carry out a bankruptcy search against each borrower and also a priority search (OS1). The bankruptcy search is necessary because a bankrupt’s assets actually vest in the trustee in bankruptcy so he is not entitled to borrow money or to charge the property (or his share of the equity if he is a joint owner), as well as the fact that obviously the lender would not want to lend to someone in that financial situation.
The priority search will tell you whether any interests have been registered against the title since you obtained official copies at the outset, and will “freeze” the register to allow your application to register the charge to be completed without the risk of another interest being registered after the date of your search (provided your application is lodged in the 6 week priority period).
Requesting the Mortgage Advance
When you’ve received clear pre-completion searches and you have received, or a least ordered, a final redemption statement, you are in a position to request the mortgage advance from the new mortgage lender. Depending on the lender they may need anything from a day to two weeks notice to release the mortgage funds.
Funds are requested by submitting the Certificate of Title to the lender. This document is found in the mortgage offer and is the document which confirms to the lender that the conveyancer is satisfied with the legal title.
The certificate of title will ask for the date of completion, which is the date that the funds will be transferred to the conveyancer. The lender will usually transfer the funds by CHAPS which means that they can only guarantee that the funds will arrive before close of business, they cannot guarantee a time.
It is a good idea to contact the mortgage lender a day or two after submitting the certificate of title to check that they have received it and that there are no outstanding conditions.
Completion of the Remortgage
Once you are in receipt of a final redemption statement, clear pre-completion searches and the mortgage advance you are in a position to complete. You’ll obviously need to supply a completion statement to the borrower detailing the remortgage advance, the redemption figure for the old mortgage and your costs and disbursements.
On the day of completion you’ll also need to redeem the existing mortgage. This should be done by telegraphic transfer unless the the lender specifically requests otherwise. It is important that the funds arrive with the lender on the day of completion as interest will usually accrue on a daily basis. Unless the lender uses the EDS1, you’ll need to send the lender a DS1. Either way you should write to confirm redemption.
After completion the new mortgage will need to be registered. Provided the transaction was remortgage only, with no transfer of equity, there is no need to submit an SDLT1. Your AP1 should include the DS1 executed by the outgoing lender (if not submitted electronically), the new mortgage deed and any certificates to deal with any restrictions on the title.
Transfers of Equity
If, as part of the transaction, one or more people are being added to or removed from the title, this is known as a transfer of equity.
At this current time, when interest rates are at a historic low, especially if you have a good credit rating and have been a reliable borrower, there are good remortgage deals to be had so make sure you shop around for the best rates.
If you think that you are paying too much on your current mortgage, why not start looking for the perfect deal for you? It could save you thousands of pounds in the long run.
Using a mortgage broker means that you will get independent advice and help to find the best deal for you, especially a whole of market mortgage broker.