Last Updated on 5th October 2020
Deciding whether to remortgage early or waiting until your fixed term expires is a common situation to be in. With low-interest rates, many homeowners are deciding to remortgage, even if it means having to pay an early repayment charge (ERC).
Each mortgage varies and so do the charges involved. There’s a lot more to consider when deciding whether to remortgage early or not. For instance, securing a lower interest rate than what you’re currently on doesn’t guarantee you’ll be saving money. On the other hand, avoiding an early repayment charge also doesn’t guarantee that waiting is a better option.
Is it a good idea to remortgage early?
Calculating the cost of your overall mortgage and comparing it to a new deal is crucial in deciding whether to remortgage or not. Furthermore, factoring in fees and charges such as early repayment charges is also very important. Once you’ve calculated everything, only then will it become clear on whether or not you should remortgage during a fixed-term.
If remortgaging early will save you money, then it may be a good idea to switch lenders. Furthermore, your existing lender may have other deals available if you decide to remortgage earlier than agreed.
The three main factors you must consider when deciding to remortgage earlier than planned are:
- Charges for leaving your mortgage early
- Costs of starting a new mortgage
- Your new mortgage rate and terms
We’ll explore each of these factors in more detail below.
The cost of leaving your mortgage early
Many lenders will have what’s called an early repayment charge (ERC) if you choose to leave your mortgage early. This is especially true with fixed-rate, capped-rate and cash-back mortgages but can also apply to other mortgage types too.
Early repayment charges are put in place by lenders and are legally binding terms of your mortgage. Lenders do this so that they’re protected against financial loss from mortgages ending early. This is because lenders calculate their rates based on an entire mortgage term which makes it viable for them to lend. An ERC can then be used to recoup any losses as a protection measure.
Not all mortgages will have an ERC. If you’re not in a fixed-term, you may be able to remortgage with little or no cost. It’s important to check whether you’ll be charged, as an ERC can accumulate to thousands of pounds. If so, you may be better off waiting until your fixed-term expires before you remortgage.
An ERC can also be calculated as a percentage of the amount you still owe to your lender. Ultimately, the amount of your ERC depends on your lender and the terms and conditions of your particular mortgage product.
How much does it cost to start a new mortgage?
Finding a cheaper mortgage deal can be very tempting, but you must remember that there will be costs involved. Each mortgage deal will vary quite considerably and so do the fees and charges involved. That being said, the charges you’ll need to consider when starting a new mortgage are:
- Arrangement fees
- Survey and valuation fees
- Legal fees
- Reservation or booking fee
Some products may include some or all of the fees above. Other deals may have free legal work or even free valuations included as part of the deal. Nonetheless, each cost will accumulate which you need to calculate and decide whether starting a new mortgage will be cost-effective. This is in addition to the cost of ending your deal early. Once you’ve calculated all of the costs involved, it should be quite clear what the best option is.
It’s also important to remember that even if you wait to remortgage once your term ends, you’ll still be charged to start a new mortgage. The only charge that you’ll save money on is an early repayment charge.
Read more: Remortgage fees explained.
Securing a rate in advance to avoid early repayment charges
If you’re approaching the end of your fixed-term, you may be able to secure a rate six months in advance. This way, you can agree on a favourable rate and then remortgage when you’re able to without any early repayment charges. Some lenders may only allow you to secure a rate for three months in advance so do check with each lender beforehand. Our advisors can also help you with this.
Securing a mortgage rate in advance can be quite useful, especially if rates are low or you think interest rates may rise. That being said, there are risks involved if you choose to agree on a rate in advance.
Lenders will typically charge a booking fee or an administration fee to reserve a mortgage deal. In doing so, you risk losing the fees you’ve paid if you withdraw at a later stage. This can happen if better rates emerge after you’ve paid a fee to secure a now unfavourable deal. Furthermore, if you decide to ditch the deal you’ve paid for, you’ll more than likely be charged cancellation fees.
It’s worth speaking to an advisor before you commit to a deal. We’ll be able to advise you on what direction the market seems to be going. This is because we’re constantly in touch with rates and lenders on a daily basis.
What you should check before remortgaging early
If you’re thinking about a remortgage, there are other things to consider in addition to the costs involved. It’s a good idea to check the following before applying with a lender.
- Your income and affordability
- Equity in your property
- Reducing your loan to value
- Your credit score
By taking these points into consideration, along with the costs of ending and starting a mortgage, you should be on the road to remortgage success. Furthermore, you may be able to save a huge chunk on any future mortgage payments.
Are you able to borrow the amount you need from a remortgage?
Each lender will carry out their affordability checks in a different manner. Some are less strict when it comes to a remortgage, however other lenders will use different income multipliers to assess what’s affordable and what isn’t. Some lenders will only lend up to three times your annual income, whereas other lenders may lend more, possibly five times your income.
Just because your existing lender agreed to your mortgage amount, doesn’t mean every other lender will. That being said, if you’ve been paying your mortgage and haven’t borrowed any more, then you shouldn’t have any problems with affordability. Nonetheless, if your income has drastically reduced since your mortgage started, you may run into problems.
Consult an advisor if your income has reduced since you last started or switched your mortgage. We’ll then check which lenders are likely to say yes and the amounts you’ll be able to borrow.
Why is equity and loan to value so important?
The amount of equity you have in your property will also make a huge difference when you remortgage early. If you have little equity it can be difficult to remortgage. If you have no equity or are in negative equity, it will be impossible to remortgage.
On the other hand, if you have a lot of equity, a remortgage shouldn’t be difficult. This is especially true if the rest of your application is satisfactory. You may even be able to release some equity for home improvements or another property purchase.
To calculate your equity, simply deduct how much mortgage you owe from the value of your property. The amount remaining will be the amount of equity you have. If your property has increased in value you may be able to reduce your loan to value (LTV). This helps to unlock better deals as they’re typically available with lower loan to value ratios.
For instance, if you remortgage at 60% LTV, it’s likely you’ll be offered the most competitive rates. In comparison, if you want to remortgage at higher loan to value ratios such as 80-90%, the rates perhaps won’t be as attractive.
Check your credit score before remortgaging
Checking your credit score and downloading your credit file is advised before applying for any type of loan, including mortgages. Downloading your credit file won’t harm your credit score. Footprints are only left on your credit file each time you apply for finance.
It’s important to check your credit file before you decide to remortgage earlier than anticipated. It’s common for issues to be flagged on a credit file that you may not be aware of. If you apply to remortgage but are declined due to having poor credit, it can further impact your credit score.
On a positive note, as you already have a mortgage, lenders are able to assess whether you’ve made your mortgage payments on time. In doing so, it greatly improves your chances of being approved, even if you have had slight credit problems. Nonetheless, consult an advisor if you find anything on your credit report as some lenders can be very strict.
Specialist advice for early remortgages
As we’ve explained in this article, there are many things to consider before committing to a remortgage. There’s a lot more to think about than just finding a better mortgage rate. If you truly want to check whether or not you’ll save money, speak to an experienced advisor.
Make an enquiry and our advisors will calculate everything for you. Furthermore, we’ll search the entire market for any possible deals you’re eligible for.