Re-mortgaging - where you replace your existing mortgage with a new one - can be a good idea if you are obtaining a new mortgage with better features, such as a reduced interest rate, or if you need to raise cash and there is sufficient equity in your home to take out a bigger mortgage.
A new mortgage offering just a small reduction in the interest rate can make substantial savings to your monthly mortgage payments, and easily offset the costs and time spent switching deals. However, you want to avoid over borrowing, which could significantly increase your financial risk, although in the current economic climate where mortgage lending has been restricted and there are fewer re-mortgage deals, this is less likely to happen than in the past.
Re-mortgages are available direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker, which is often helpful if your circumstances are less straightforward than the average, for example if you are self-employed.
The best re-mortgage deals are open to homeowners with the highest loan-to-value ratios, i.e. the proportion of loans on the property compared with its current value. Conversely, adverse re-mortgage deals are likely to be the most expensive, as these are designed for people with less usual circumstances than the norm, for example for those requiring a buy to let re-mortgage or with more than one job, who receive a significant amount of pay in commission, who are self-employed or contract workers. Such loans are suitable for those people with an adverse credit problem such as a loan default, county court judgement or are a discharged bankrupt.
The two main ways to repay the mortgage are 'repayment' and 'interest only'. With a repayment mortgage you make monthly repayments for an agreed period until the loan and interest have been paid back in full.
Monthly payments for interest-only mortgages are lower as you are making monthly repayments for an agreed period only to cover the interest on the loan and therefore you will usually have to arrange a savings or investment plan geared towards paying off the loan at the end of its term.
Some mortgages are flexible, allowing you to vary your monthly payments, or to combine your mortgage account with savings and other income.
There is a choice of interest rate options for loans too: for example, 'variable' and 'tracker' rates change in line with Bank of England rates, while 'fixed' rates are fixed for a set number of years, and 'capped' rates have a variable interest rate with a ceiling so your monthly payments will not exceed a set amount.
By Ben West