Remortgage: the low-down

Why remortgage? If you`re a new homeowner, you may ask why people don`t stay with their existing mortgage until the end of its term. After all, if you`ve just signed up to a mortgage that`ll run for (probably) decades, you`ll be forgiven for wondering why so many people are even thinking about remortgaging.

Someone looking to remortgage could be doing so for a number of reasons, but here we examine just three of the most common ones:

• freeing up cash with a remortgage
• getting a better mortgage deal, and
• reaching the end of a mortgage deal

Freeing up cash with a remortgage

Normally, houses in the UK do appreciate in value! Today`s declining prices are the exception, not the rule. The average house, according to the Nationwide House Price Index, was worth £161,797 in September 2008 - about £100,000 more than it was at the start of 1998.

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A remortgage can let homeowners free up some of the money in their home, turning it from equity into cash. For example, someone with a £40,000 mortgage on a house that`s now worth £160,000 could basically withdraw £40,000 (minus fees) from their house`s value by taking out a new £80,000 mortgage, assuming they could afford the new higher mortgage payments.

They could use half of that £80,000 to pay off the old mortgage and use the other half for something else - like paying off debts (this is known as a debt consolidation mortgage) or financing home improvements. There`s a limit to the amount they can free up by remortgaging, especially during a housing market downturn. Today, most mortgage providers won`t offer a remortgage beyond 75% of the house`s value (the LTV - Loan To Value - ratio). Anyway, experts like Graham Beale, Nationwide`s Chief Executive, are predicting that house values could drop to 25% below their peak value (October 2007), so it`s a good idea to leave a substantial percentage of the property`s value as a ‘buffer` against possible future price drops.

The person in our example would be leaving £80,000 of equity in their house, so they wouldn`t be in ‘negative equity` unless house prices dropped another 50%!

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Remortgaging to get a better deal

In the UK, the interest rates on new mortgages tend to follow the base rate set by the Bank of England. When the base rate goes up/down, new mortgages tend to get more/less expensive (although mortgage providers aren`t actually obliged to change their prices).
So sometimes, it`s well worth remortgaging to get a better deal. If you signed up to a mortgage when the base rate was quite high, keep an eye on the base rate next year - a lot of analysts are expecting the base rate to drop to 2% or even lower, so you could find a much cheaper mortgage in 2009!

Of course, it all depends on how much of the drop mortgage providers decide to pass on to their customers, so you`ll need to talk to a mortgage broker who understands what they`re all offering and who can give you some tailored mortgage advice.

Remortgaging at the end of your mortgage deal

A lot of mortgages start with a fixed-rate period (often two or five years), then ‘revert` to the mortgage provider`s SVR (Standard Variable Rate). If you`re coming up to the end of a fixed-rate period, you`ll have to decide whether to start paying the SVR or look around for a new fixed-rate mortgage.

It`s not just a question of cost. Some people simply prefer fixed-rate mortgages because they know how much they`ll be paying each month. As the name says, the cost of a variable mortgage can vary, going up and down with the base rate.

Again, talk to an expert. Remortgaging is a big decision and it`s vital to get some professional advice before you commit yourself to anything.

Tags: remortgage, remortgages, remortgaging, mortgage, mortgage deal, remortgage deal

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