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Guide to Remortgaging

Dec 20, 2013

Please note:
This guide contains information about the mortgage product options available in the mortgage market generally. Not all products referred to are available from Teachers Building Society. For details of the range of mortgage products currently available from Teachers Building Society, please visit our mortgage homepage.

Why remortgage?

Remortgaging means changing your existing mortgage deal for a new arrangement with a different provider. You may achieve a better mortgage deal by remortgaging from one lender to another and we recommend reviewing your mortgage annually to see if you could save money.

For most people, mortgage repayments are the primary financial commitment, so it makes sense to ensure that you are not paying any more than you need to. If you are paying a lender's standard variable rate (SVR) for example, there's a good chance you could save money by shopping around.

Where do you start?

Approach your current lender first to see what they can offer you. After all, you may not need to move your mortgage to another lender to achieve a better deal. Then, have a look at the deals currently on offer from other lenders and, if you see an attractive rate, contact the relevant lender for a decision in principle.

If you decide to switch provider, contact your existing lender for a redemption figure so that you know exactly how much is required to redeem your existing mortgage. You can also check any fees that may be charged to bring that arrangement to a close. You will need a solicitor or licensed conveyancer to handle the legal work and you can either appoint your own or use a firm recommended by your new lender or broker.

A remortgage can be a way to free up some cash for home improvements, for example. Consider the current value of your home, the level of repayment that's affordable and what your current lender has available.

When you're shopping around, bear in mind that many of the best deals are aimed at homeowners with a lower loan to value ratio or LTV. For example, if your home is worth £200,000 and your mortgage amount is £120,000, you have a loan to value ratio of 60% so may qualify for a lender's best available rate.

What type of mortgage?

The first choice you need to make is between an interest-only mortgage, repayment mortgage, or combination of the two. Most lenders apply a limit to the proportion of property value that they will lend on an interest-only basis, and some have withdrawn from interest-only lending altogether.

Interest-only

With an interest-only mortgage, you are repaying the interest on your loan, not the actual loan amount. If you opt for an interest-only mortgage, it is very important that you set up a suitable investment plan to build up enough money to repay the loan at the end of the mortgage term. If you originally took out an endowment mortgage, there's a chance that your investment may not perform as expected. It is important to review your arrangements regularly and contact your lender if you identify a shortfall.

Repayment

A repayment mortgage means that you are paying off some of your mortgage loan amount every month, so at the end of the mortgage term you will not have a balance to repay. Some people combine a repayment mortgage with an interest-only element so that the balance to repay at the end of the mortgage term is reduced.

Now for the low-down on the types of mortgage product on the market:

Standard Variable Rate (SVR)

A standard variable rate is linked to, but not the same as, the Bank of England interest or 'base' rate. Lenders tend to alter their SVR's as the Bank of England moves its rate up and down, but they are not obliged to do so or pass on the whole rate change.

Fixed

A straightforward concept, a fixed rate mortgage means the rate does not change as long as the fixed rate term is in force. The fixed rate term is typically 2, 3 or 5 years but some lenders will fix for longer. At the end of the fixed rate period, the interest rate charged will usually revert to the lender's SVR.

Tracker

A tracker mortgage follows the base rate, so if the Bank of England rate rises or falls by 1%, then your mortgage interest rate will do exactly the same. Tracker rates currently tend to be between 1.4% and 2% higher than the Bank of England base rate, and some of these products have a 'collar', which is a minimum level below which your interest rate will not go.

Discount

A discount mortgage is usually a rate that is discounted from a lender's standard variable rate (SVR). These discounts usually last for an initial period, e.g. 2 years, after which the rate will revert to the lender's SVR.

Cash Back

A cash back mortgage is precisely that - on completion of the mortgage, your lender will pay a percentage of the amount borrowed 'back' to you as a lump sum. Do bear in mind that the higher the cash back amount, the greater and more complex the number of strings likely to be attached to the mortgage, so make sure you understand all aspects of the product.

Capped

A capped rate mortgage could be for you if you want to know the most you will ever have to pay each month for your mortgage, but at the same time you benefit by paying less if interest rates fall. The loan has a maximum interest rate over which you will not be charged for a set period. However, lenders usually set a higher rate for a capped mortgage over, say, 3 years, than they would charge on a fixed rate for the same period.

Offset

In principle, an offset mortgage works by using savings to cancel out mortgage debt. There are two basic types of offset deal, a current account mortgage (CAM) which links a homeowners current account with their mortgage so they see one statement and one balance, and an offset mortgage where the deposits are kept in separate accounts but linked for the purpose of interest calculation. With both types of offset, borrowers usually make a regular monthly payment, as with any other type of mortgage.

Buy to Let

Buying property to rent out is very popular in the UK and buy-to-let mortgages cater for this specific purpose. The type of mortgage deal on offer varies from fixed rates to trackers, and lenders will normally require a deposit of at least 25%. Rates are usually higher for Buy to Let mortgages.

Whatever you choose, remember to check any early repayment charges that may apply if you want to move your mortgage again. You should also consider arrangement fees, valuation fees and legal costs when you're assessing which deal is best for you.

Read the Key Facts Illustration for your chosen mortgage - this will tell you everything you need to know to make a decision about your mortgage.

If you are using a broker, make sure you're aware of any additional fees that you may be asked to pay.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.