We outline the differences between the two popular affordable housing schemes.
Who is this guide for?
Anyone who currently has a mortgage but would like to switch to another provider. There are various reasons why you may want to do this; a lower interest rate, to borrow additional money from the new lender or extend/decrease the term of your mortgage.
Remortgaging means you move your mortgage from one lender to another to get a better deal. You don’t have to move house to remortgage. There are many reasons why remortgaging could make sense for you, but most commonly it is to save money.
For most people, their mortgage is their biggest financial commitment. If you don’t shop around for the best deal, you could be missing a trick and spending more annually than you need to.
It’s always best to start with a conversation with your current lender, ask them to review your current mortgage deal and see if they have a suitable product that could reduce your monthly payments.
If you do need to move to another lender, remember, although remortgaging can save you money, it will come at a price. There could be fees to pay for the better interest rate deals, and, depending on your current mortgage deal, an early repayment charge may be payable to your current lender and there may be legal fees to pay.
It is always advisable to carefully do the sums and ensure that it makes financial sense and you are saving money overall.
Who shouldn’t remortgage?
Despite the potential savings available, there are some situations where remortgaging is not suitable. It is a question of money, timing and your personal circumstances. Here are some reasons why remortgaging may not be appropriate or financially viable for you right now. Think carefully before proceeding with a remortgage application if you fall into one of the following categories:
You already have a great mortgage deal
You may find that your current mortgage deal is good when you come to comparing it to other deals available from your current lender or other lenders. Depending on the market, chances are it won’t always be top of the tree though, so eventually you may need to re-visit remortgaging at some point in the future. However, it is worth doing some market checks now and again so that you know you have got a good deal.
You are locked in with penalties
Alternatively you may be on a poor deal, in comparison to others available on the market, but it has a substantial early repayment charge that would cost too much to free yourself from. Do your homework, and be ready when the situation changes.
Your financial or employment circumstances have changed
If your financial position has altered since you took out your current mortgage — for instance, one of you has stopped working or become self-employed, approaching new lenders may not be successful as they may not be prepared to offer you a loan because you no longer fit their criteria. Again, check with your current lender first, it may be that you are financially better off to stay where you are.
You have a very small mortgage
Once your mortgage falls below a certain amount — usually around £50,000 — it may not be worth switching deals, simply because you are less likely to make a saving if the remortgaging fees are high. In fact, some lenders don’t lend on mortgages below £25,000. The smaller your mortgage, the bigger the effect any fees you pay to remortgage will have. In some cases, it may be worth remaining on a higher interest rate to avoid the fees.
Get ready to remortgage
There are three checks you should make on your current mortgage deal before you start:
Early repayment charge?
Most mortgages have an early repayment charge (ERC) during the initial deal period; some may have extended financial penalties after the deal ends as well. If you remortgage during this period you will need to pay the charge; which can be thousands of pounds. So before you go any further, you need to know:
- Is there a charge?
- How much is it?
- What date does it apply until?
With this information, you can work out if it’s worth paying the charge in comparison to the savings you will make on your new mortgage deal.
Exit or admin fees?
You will also need to find out if you will need to pay an exit fee from your current mortgage deal. Most mortgages will have an administration fee for releasing the deeds to your solicitor. It typically ranges from £50 to £200. Your lender should only charge you these kinds of fees if you were told about them when you took out your mortgage.
How much is owing on your current mortgage?
Find out how much you owe your current lender, your mortgage term and the repayment method (capital & interest or interest only). When looking into remortgaging, you should always start with your current lender. They will provide you with this information when looking into the possibility of a product transfer for you. But, without this information, you won’t know how much you’ll need to remortgage for if you go to a new lender. Don’t be tempted to just estimate a figure. Call your current lender and request the figures required to clear the mortgage on a set date. Giving them a set date means it will take into account any normal repayments you are due to make between now and then. Relying on a rough estimate could mean you end up with a shortfall you’ll need to pay additionally.
Get your paperwork ready to remortgage
Before you start the application process you could boost your chances of getting the best deal possible by improving your credit score and proving your affordability. Also, make sure you have all the paperwork you will typically need;
• Proof of income (last three months’ pay slips or two to three years’ accounts if you are self-employed or a limited company)
• Last three months’ bank statements
• Proof of bonuses or commission
• Last P60 tax form
• SA302 tax return forms if you’re a sole trader (typically between two and three years’ worth, depending on the lender.)
Remortgaging if you are self-employed, contractor or freelance
If you’re self-employed or would struggle to prove your long-term income (for example, you’ve worked abroad or you’re on a temporary contract), then remortgaging can be more difficult. You will need to prove your income, usually at least two years of accounts. This can be difficult if you work for yourself, or you are on temporary contracts rather than a permanent contract.
Again, you should always start by talking to your existing lender, but you will still need to evidence your income if you want to borrow additional money on your mortgage. This is usually done through the following formats:
- Business accounts - you want to be able to show preferably three years of accounts, though two can suffice. Most lenders will need them to be signed off by a chartered or certified accountant.
- Tax returns - if you can’t show business accounts, then two or three years’ tax returns are the next best option. You’ll be assessed on profits, not turnover.
- Contracts – if you are a contractor, you will need to provide your current contract and employment history.
All in all, the remortgaging process typically takes from four to eight weeks to complete, although in some cases lenders may be able to complete them more quickly. The remortgaging process can be broken down into seven key steps, read our article for further information.