Remortgaging simply means switching mortgages to a new lender or a different home loan with your current lender. Many people remortgage to release equity and pay off other debts. But while borrowing extra money against your home can be cheap and convenient, it’s not risk-free. We’ve looked at the different reasons to remortgage.
What is a remortgage?
Remortgaging means taking out a new mortgage to pay off your existing mortgage. In our Move iQ podcast we explain in detail how remortgaging works.
In general, there are numerous reasons people remortgage. These include to:
- find a cheaper mortgage
- pay off other debts
- fund a big purchase
- pay off their mortgage earlier
- respond to a change of circumstances, such as a divorce
How can I save money by remortgaging?
If you remortgage to a lower interest rate and borrow the same amount of money and keep the same term, you could save money by remortgaging, subject to other factors such as associated fees.
For example, if you had a £200,000 mortgage over 20 years at 3%, you’d pay £1,109 a month. If you remortgaged to a deal at 2%, you’d pay £1,012 a month. That works out to £97 a month saving.
You might be able to remortgage to a lower interest rate if your home has risen in value since you bought it. This is because you’d be borrowing at a lower loan-to-value (LTV). As interest rates have risen considerably in recent months this may not always be possible depending on individual circumstances.
Each mortgage product comes with a ‘maximum LTV’ which sets out the mortgage loan-to-value requirements. This figure is normally between 60% and 95%. Mortgage lenders offer their cheapest mortgages to borrowers with a low LTV, specifically under 60%.
Most fixed rate mortgages revert to the lender’s standard variable rate (SVR) when the fixed rate ends. The SVR will usually be higher than the fixed rate, so many people remortgage at this point to keep their payments as low as possible.
It’s always worth speaking to a mortgage adviser to discuss your reasons to remortgage. Our preferred mortgage advisers have access to 12,000 mortgage deals from 90 lenders.
Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Individual savings may vary, your savings will depend on personal circumstances.
What is remortgaging to release equity?
One of the reasons to remortgage is remortgaging to release equity. Homeowners often remortgage to increase the borrowing against their home. To do this, you’d need to remortgage for a higher amount than you currently owe. This is known as ‘further advance’ (if with same lender) or additional borrowing (if part of a remortgage) often it depends on what the funds are for.
For example, if you had a £200,000 mortgage on a home worth £300,000, you might remortgage for £250,000. When the remortgage completes, £200,000 would be used to pay off your existing mortgage and you’d receive £50,000 in cash.
You could use this money to pay off other debts, pay for home improvements, or fund a big purchase.
Should I remortgage to pay off other debts?
If you have sufficient equity in your property, you might remortgage to release this equity and use it to pay off your debts.
This can be cost effective as mortgages tend to have lower interest rates than other forms of borrowing such as credit cards and loans.
To remortgage to pay off your debts, you’d need to increase the borrowing against your home. When you receive the cash from the remortgage, you’d need to use it to pay off your debts. Then you’d only need to pay your mortgage each month, not multiple debt repayments too.
But remortgaging to consolidate your debts is risky for several reasons. All things being equal, upping the amount of debt against your home would mean higher mortgage payments. You need to make sure you could afford the new payments as your home could be repossessed if you don’t pay.
You’d also need to be confident that you wouldn’t then run up debts elsewhere again and end up back at square one.
Either way, remortgaging to pay off your debts would mean you repay the debts over the length of your mortgage. Typically, this can be up to 25 years. Paying interest on your debts for this length of time might mean that overall, you don’t save as much money as you thought you would by remortgaging.
Lenders have in general strict requirements and policies in place on debt consolidation, meaning that this is not always possible.
It’s always worth speaking to a mortgage adviser to discuss your mortgage options.
Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Individual savings may vary, your savings will depend on personal circumstances.
Should I remortgage to fund a big purchase?
Whether it’s a good idea to remortgage to pay for a big purchase depends on what you’re buying. If you’re using the money for home improvements that will boost your home’s value, remortgaging can be a shrewd move.
It can also be worthwhile if you need to the cash to buy a car to use to get to work, or to pay for a course that would boost your earning potential.
But if you’re remortgaging to pay for an expensive car or a big holiday, it might be more sensible to budget and save up for these things.
Our advised mortgage advisers Rated Excellent on Trustpilot and are winner of the 2021 Best Mortgage Broker award.
Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Individual savings may vary, your savings will depend on personal circumstances.
Last Updated: December 15th, 2022
