How remortgaging works
Updated: Mar 2, 2021
Remortgaging to get a better interest rate
Remortgaging is a great way to get a better rate on your loan repayments and hopefully make your monthly payments cheaper. One of the best ways to do this is to try and reduce your loan-to-value (LTV). LTV is the size of your mortgage compared to the value of your property. So, if your property is valued at £230,000 and you have an outstanding mortgage of £150,000, then your LTV will be 65%.
Mortgage rates are based on LTV bands, usually of 5% – so 95%, 90%, 85%, etc. The lower your band when you apply for a remortgage, the wider your choice of deals will be.
You may want to consider overpaying on your current mortgage (ie paying more than your minimum loan repayments) until you drop down into the next LTV band. This is especially useful if you're in the lower end of your current LTV band, for example say your current LTV is 62% and you’re thinking about remortgaging soon. Even a small increase in your monthly payments can lead to hefty savings – overpaying doesn’t just reduce your loan, it also gets rid of the interest you would have paid on that part of the loan. Make sure you’re allowed to overpay without penalties first – sometimes lenders will restrict the amount you’re allowed to overpay during the introductory rate period of a mortgage.
If the value of your property has gone up, that could help you drop an LTV band too – if LTV = mortgage/value then more value means a lower LTV. To maximise your chances of a higher valuation, always put a (accurate) top price you think your property is worth on the application and make sure that it looks presentable inside and out when the surveyor visits. In the case of remortgages, most valuations are automated, but not always.
Remortgaging to get more flexibility
As well as saving you money, remortgaging can also help loosen the restrictions on your loan agreement, giving you increased flexibility over your finances. This is useful if your circumstances have changed – or are likely to change – since you took out your original mortgage. For instance, say you had a windfall or got a promotion, and now want to start paying more to become mortgage-free faster, either by paying the lender a big lump sum or by upping your regular monthly payments.
You might want to remortgage to a deal that lets you take a payment holiday – a break from your mortgage repayments (though you’ll still pay the interest on your loan).
Or you might want to get on an offset mortgage: you open a current or savings account with your mortgage lender, who then won’t charge you interest on the same amount in your mortgage.
So if you have a £100,000 mortgage and put £10,000 into a linked savings account, you’ll only pay interest on £90,000 of your mortgage.
Remortgaging to borrow more money
Remortgaging also lets you increase your mortgage loan if you want to – ie borrow more money against your home. If the value of your home goes up, so does your equity. Your equity is the value of the share of your property you’ve paid off in full, as opposed to the remaining share that is your mortgage.
Let’s say your home is worth £300,000 and you have a remaining mortgage of £200,000 – that makes your equity £100,000 (or 1/3rd/33%)
A few years later and the value of your home goes up from £300,000 to £3300,000. Your equity is now £110,000. You can now increase your mortgage amount against that – £250,000, say – meaning you borrow £20,000 more with a remortgage.
You can use that money to, for example, build an extension or even dig out the basement. If you’re thinking of spending money on your home, make sure you work out how much value you’ll really be adding, and whether it wouldn’t be more cost-effective to move. Read more on remortgaging to borrow more, also known as releasing equity.
Can I remortgage to pay off my Help to Buy loan?
Yes. As you probably know, Help to Buy (HTB) lets you buy a new-build property with as little as a 5% deposit – the government lends you the rest of the deposit (up to 20% of the sale price/40% in London) and you borrow the rest via a standard repayment mortgage. The government loan is interest-free for five years, but then interest starts to rise year-on-year, so in most cases after that five-year period has elapsed it’s cheaper to remortgage and repay their HTB loan.
Of course, you’ll need to make sure you can repay the mortgage itself, when your HTB loan is added to your mortgage. Whatever you do, you’ll need to get permission from your Help to Buy agent, and like always make sure you’ve worked out the numbers in advance. This is where using a fee-free broker who can talk through your specific situation comes in handy.