Last edited 09 Jul 2018

Remortgage

A mortgage is a loan taken out to buy property or land. Typically, mortgages are taken out for the purchase of homes and run for 25 years but mortgages are also available for commercial properties, and the term can be shorter or longer. The loan is ‘secured’ against the value of the property or land until it is paid off.

Remortgaging (or ‘refinancing’ in the United States) is the process of taking out a new mortgage on the property or land. This may be done when the terms of the mortgage change, or to take advantage of a better deal offered by a different mortgage product, or to borrow additional money.

For example, fixed mortgages rates, particularly ones that offer low interest rates, may only last for a limited time – around 2 to 5 years. When this period ends, the lender will generally move the mortgage onto a standard variable rate (SVR) which is often higher than the previous interest rate. In this situation, there may be cheaper interest rates available on the market which could save the borrower substantial sums of money. As a result, they may remortgage the property.

Some other reasons why property owners may choose to remortgage include:

The property value has increased since the first mortgage was taken out, making the it eligible for lower rates.
There is a concern that interest rates may go up.
In order to pay off the mortgage earlier.
To raise capital for home improvements, to pay off other debts, etc.
For a more flexible mortgage that will allow some payments to be missed (‘payment holidays’).

Before remortgaging, it is important that the property owner carefully assesses all the cost implications. For example, they may be required to pay an early repayment charge to the existing mortgage lender which can be high, as well as an exit fee. These should be compared with the savings that can be made by switching to a different mortgage product.