A guide to remortgages

Three years after the financial meltdown, the road to recovery is still a slow process. Government initiatives attempted to kick-start the economy but the average homeowner is understandably nervous about the future. Reducing costs and maximizing equity have become the norm, with the individual dusting off their trusted mortgage calculator to decide if the time is right to remortgage.

The bursting of the housing bubble in 2008 was long overdue. Trusted financial institutions had taken on unsustainable amounts of mortgage debt bundled into seemingly attractive packages. Property was hot and lenders were keen to highlight the benefits of owning your own home as opposed to renting.

The increase in home ownership led to an ascending spiral of house values that, conversely, led to a decrease in the interest rates of lenders. Savings could now be pumped into property and provided that mortgage obligations continued to be met, everything in the garden looked rosy.

Hindsight shows that this didn’t last. Properties were overvalued, lenders were forced to increase interest rates and many homeowners found themselves in financial difficulties. Saving money became the new goal and prudent lenders could now offer homeowners an alternative to selling their property through remortgages.

At its simplest level, a remortgage is paying off your current mortgage in full to your existing lender with funds obtained from another, using the property as the security for the new loan.

Remortgaging is occasionally confused with the term refinancing. If the homeowner chooses to raise capital through a refinance loan, this can be obtained from the existing lender whereas a remortgage involves taking a loan from an alternative mortgage provider. Taking out a different product with the same lender is not a remortgage.

By switching lenders, the homeowner can look to secure a more favourable interest rate and reduce their monthly payments on the property. The process of remortgaging can also serve to release equity by raising the capital to cover other short-term debt or even allow for home improvements. Equity is calculated as the difference between the market value of the property and the amount still owed to the original lender.

The process of remortgaging is not overly complicated. Like an original mortgage, it requires an application and paperwork. It will probably involve a valuation of the property and will certainly be dependent on proof of income and any other debt.

There are, however, some issues to be considered before remortgaging.

Firstly, your current lender will have put some penalty clauses or redemption fees into your original contact. These could be draconian during the first year, as the lender will have wanted to confirm the long-term nature of the agreement. It would be prudent to add up these penalties to see if remortgaging is worthwhile.

Secondly, the new lender will not rely on your original survey to provide a valuation. They will require that the property is re-assessed for its current market value and will offer the remortgage based upon that valuation. Some lenders may offer this for free to make them seem more attractive, but you should always expect to incur some costs if you decide to remortgage.

Finally, there is the issue of who to choose. There are numerous lenders who are looking for business and again, similar to the original process, it may be wise to shop around for the best deal. You should also think about using an independent third party to search for comparisons but there are a plethora of Internet resources that can point you in the right direction.

It may have been only three years since the bubble burst, but an investment in bricks and mortar is still a sure way to feel financially secure. A remortgage could be the next step in maintaining your independence.