Read what a remortgage is, and if it's a good idea for you to get one, in this article. Remortgaging your home is a big step; read how it works now
If you are near the end of your loan term, or you simply want a mortgage better suited to your changing financial situation, then you will want to consider remortgaging your home. Here is everything you need to know about remortgaging, from its benefits, to when it’s a good idea, to the steps for securing that better mortgage for yourself.
This article is part of our client education series. For all those mortgage professionals out there who frequent our site, we encourage you to pass this article along to any client of yours who ask questions about remortgaging.
A remortgage is when you stay in your home but change the mortgage from one lender to another. In other words, your old mortgage is replaced by a new mortgage. Read on to find out a few common scenarios that make this an attractive option for homeowners.
Why homeowners remortgage
- If you are near the end of your current mortgage term.
- If you want a better deal on your mortgage from a different lender.
- If you want to borrow more funds against your home.
The process of remortgaging your home includes about seven steps, which are:
- Considering costs.
- Deciding in principle.
- Applying for the new mortgage.
- Finishing any legal work.
- Reviewing the offer.
Let’s take a more in-depth look at the remortgaging process and what each step entails:
Because there are so many mortgage deals on the market, it is important to do research such as asking your current lender. For instance, if you live in Canada, remortgage deals may be different than if you live in the U.S. Before shopping around for the best deal, you should ask your current lender about their rates and if you can change to a mortgage rate that is better suited to your financial situation.
2: Considering costs
It is critical that you know for sure whether remortgaging your home will be beneficial to you financially. Some of the costs involved with remortgaging are:
- New lenders may charge you booking or completion fees.
- Costs for property valuation.
- Costs for conveyancing.
- Current lenders could also charge exit fees or early repayment charges (ERC).
3: Deciding in principle
This is also termed an Agreement in Principle, which can provide you with a good picture of how much money you may be able to borrow. Getting a decision in principle does not necessarily mean you will be approved for the mortgage application or commit you, and includes a soft credit check, meaning it will not affect your score.
4: Applying for the new mortgage
After deciding in principle, you are ready to start applying for your new mortgage, which you can do over the phone, in the banks or lenders' branch, or online. To confirm your income, you will be asked to turn over supporting documents, plus undergo a hard credit check. Some of those supporting documents typically include paperwork for your home insurance cover and your current mortgage.
5: Finishing any legal work
To help finish your legal work, you may need to choose your own lawyer. Other times, the lender may appoint a licensed conveyancer or a solicitor. Appointed conveyancers or solicitors usually manage the legal work and transfers of money for you. They will also ensure your new mortgage amount will cover the costs to repay your current lender.
6: Reviewing the offer
To get security for your new mortgage, your new lender will organize a valuation of the property. After this stage is completed, your lender will give approval for the application, then send you the offer to review and accept (or not).
After the completion date, your new mortgage begins, and your previous mortgage is paid off. At this point, your new lender sends you the date and amount of your mortgage repayment.
When applying for a new mortgage, it is critical to do your research and know where your money is ultimately going to go. After deciding in principle, you will receive help during the remaining steps of applying, completing the legal work, reviewing the offer, and closing.
There are many benefits of remortgaging, as mentioned: whether it be to secure a new mortgage that makes more sense to you, avoid fees, or build equity. When deciding on whether remortgaging will benefit you, it is important to weigh the pros and cons first.
Here are four questions you should ask yourself when comparing your current lender with a new lender:
- Who provides the better rate? You should stick with your current lender if they offer you a better rate. But you should go with a new lender if you do your research and find a lender that is more competitive. Occasionally, you can return to your initial lender with the new rates and see if they can match it or beat it.
- Who offers lower fees? Many new loans come with high closing costs (in the thousands), whether you stay with your original lender or go with another one. Before committing one way or another, you will want to do your research to understand the complete breakdown of the costs. In other words, which costs can you shop for, and which come with the mortgage? Until you know these details, you will have a difficult time sussing out the best deal.
- Who is better to work with? You will want to refinance with a new lender if you are having problems with your current lender. Once again, it is a highly competitive field and you are free to go wherever you choose. Sometimes, a lender will not answer questions about the mortgage, or will avoid your emails and phone calls—which only makes an already complex process more difficult.
- Who can close faster? If you want to close fast to move out of your current property, refinancing can make this happen, although you should remember that the average closing time is between 30 and 45 days.
When you remortgage, the process will typically take between four and eight weeks. Most applications will require you to communicate with one of the lender’s mortgage advisers, who will help you secure a loan that is better suited to your financial situation.
Before getting to that stage, however, you should figure out these questions:
- How much will leaving my current mortgage cost? This can depend on your departure, since some mortgages will charge you in certain circumstances. For instance, some include an early repayment charge or an exit fee, which could cost you a lot if your current loan deal has yet to end. To get clarity, review the documents of your deal or reach out to the lender.
- What do I need from my new mortgage? You may want the flexibility to repay your mortgage fast or to have lower monthly payments. Perhaps a fixed-rate mortgage would make more sense to you. Consider your current needs and how they may change down the road.
- Is my credit score healthy? Your new lender will review your credit score with credit reference agencies when you apply for a refinance, which is why it is so critical that you ensure your credit score and details are accurate before applying.
- How much money can I borrow? A mortgage calculator can help you to determine how much money you can borrow. Also consider how fluctuating interest rates could impact your financial situation.
- What are some remortgage deals available? Before answering this, you will have to know how much you can borrow. Completing step four will help you finish step five.
Read more: Refinance: Everything you need to know
Remortgaging your house is a good idea if it will save you money, enable you to build equity, or repay your mortgage more quickly. It is an especially good idea if you can lower your interest rate by 0.5 to 0.75 of a percentage point and want to remain in the house with enough time to recover any closing costs.
- The after-tax monthly savings, i.e., the new payment versus the previous payment after tax-favoured treatment.
- The amount of time you want to reside in the home.
- How much the new mortgage will cost.
After reviewing these three factors, you will be able to calculate the return and see if it makes financial sense for you.
When remortgaging is a good idea
A few reasons that make remortgaging a good idea are:
- To lower your interest rate. A rate-and-term refinance, for instance, can ensure you get a lower interest rate, if those rates have decreased since you first got the mortgage.
- To consolidate your high-interest debts. Taking this route, you will be able to utilize cash-out refinance to access your property’s equity and repay high-interest debts, like your credit card.
- To terminate private mortgage insurance (PMI). You might also want to remortgage to avoid paying private mortgage insurance. This is generally an option if the value of your property has risen.
Remember: you will not have that much time to recoup any costs if you remortgage if you want to move soon, so that may not be the best option for you.
Beyond timing and interest rates
Another important consideration you will want to make—beyond timing and interest rates—is whether your credit is strong enough for you to qualify for the right remortgage. Invariably, anyone with the best credit will ultimately go to those with the best terms and rates. It is therefore important to have a thorough understanding of your credit report so you can understand your risk profile. You may look like a riskier borrower, for instance, if you have missed a credit card payment recently on an already high balance.
So, how much can you save by remortgaging? The answer to this depends on your closing costs. Usually, your closing costs will be between 2% and 5% of the principal amount on your loan. That means that if your closing costs are 4% on a $250,000 loan, you will owe $10,000 at closing.
However, many lenders allow you to fold the closing costs into the principal balance, instead of forcing you to pay all that money upfront. But remember, folding in those closing costs will cost you more in interest.
The only major difference between remortgaging and refinancing in most regions is the name, but essentially, they function the same way. For instance, the United States uses the term mortgage refinance much of the time, whereas it is typically referred to as remortgage in the United Kingdom.
One technical difference between remortgaging and refinancing
However, it should be noted that there is a minor technical difference between remortgaging and refinancing. A remortgage implies that that borrower stayed with their initial lender and a refinance implies that the borrower found a new lender. That difference is typically ignored among mortgage professionals since both mean that the borrower replaced his or her loan or mortgage with another one.
Remortgage and refinancing: The basics
As we have established, the technical definition of a remortgage is when one mortgage is settled using the money from another mortgage but with using the same lender. One of the major reasons for switching mortgages in this context to get a better interest rate from a new lender.
Refinancing, on the other hand, means to replace one mortgage with another but with a new lender. The major reasons for refinancing are to decrease the payment size, lessen the monthly payments, raise capital, or to consolidate other debts or loans.
When using remortgage and/or refinancing, it is important to point out whether it means switching lenders or keeping lenders. While the difference is negligible the majority of the time, the distinction could be valuable to some industry experts, so it is simply a good thing to keep in mind.
Have you recently remortgaged your home? Do you have any professional advice for readers? Let us know in the comment section below.