The principle is fundamentally simple and straight forward – when you use your home to secure a loan with which to repay and replace your current mortgage, that process is known as remortgaging.
It is the term also used if you use the home you already own outright – any mortgage or other loan has already been paid off – as security against new borrowing. When you take up that advance, your home is said to be remortgaged.
The way in which a remortgage works might depend very much on your reasons for arranging it:
- as Martin Lewis, the Money Saving Expert, points out, the overriding reason for arranging a remortgage is to save money – the total interest and monthly repayments you are making on a new mortgage are going to be cheaper than those on your current mortgage;
- a classic situation might arise, for instance, if you are coming to the end of a promotional, discounted, fixed rate mortgage with your current lender and are about to be switched to a standard variable rate loan (typically involving you in considerably greater expense);
- if you instead decide to pay off your existing mortgage by arranging a remortgage, you may be able to start all over again by taking advantage of a further promotional, discounted, fixed rate mortgage for a given number of years;
- to test whether remortgaging works to your advantage in this way, it is necessary to compare the monthly instalments you are currently paying and continue to pay for the remainder of the mortgage term with the monthly instalments and repayment term of any new mortgage;
- factored into that equation, there also needs to be an allowance for the costs you are likely to incur in setting up your remortgage – typically the legal fees incurred in drawing up the paperwork, a survey of the property involved, and the penalty or penalties likely to be charged by your current lender for repaying the mortgage early, before the end of its term;
- a significant increase in the market value of your home might also be a reason for looking to remortgage – as the value of your home increases, the mortgage to value ratio decreases and, as a result, typically qualifies you for a lower rate of mortgage interest;
- flexibility may be another reason for wanting to remortgage – some lenders do not allow overpayment of your monthly instalments as a way of reducing the outstanding loan, so by remortgaging, you may effectively reduce the amount you choose to borrow with the new loan;
- on the other hand, you may want to do the opposite and take a temporary mortgage repayment holiday – because you are returning to full time education or taking a sabbatical, for instance – and this flexibility is something you might find by remortgaging your home.
A remortgage works in a simple and straight forward way, although its precise application may vary from one instance to another, based on the borrower’s specific needs at the time. These may involve more complicated calculations and judgments than might first appear, so you might wish to seek the advice of an independent mortgage broker.
