Types of Remortgage

A wide range of remortgage alternatives is available from financial institutions, so it pays to do your research to make sure that you end up with the best mortgage product for your circumstances. Common types of remortgages include:

Standard Variable Rate (SVR)

SVR is the benchmark mortgage product used for making comparisons. When a mortgage promotional offer reaches the end of its initial term, the mortgage usually reverts to the SVR. This is the rate that you should use to compare any remortgage offers; if the proposed monthly repayments are higher than for an SVR Mortgage, you should almost certainly avoid it.

Discounted Rate

Many lenders offer mortgages where the rate of interest is a fixed number of percentage points below the SVR for a limited period. Over time, monthly repayments rise and fall with (but remain below) the SVR. The longer the discount period lasts then the smaller the discount rate is likely to be. At the end of the discount period, the mortgage rate will normally change to the SVR.

Fixed Rate

This type of mortgage is where the rate of interest is fixed for a preliminary period (often 2 years, sometimes up to 5 years). At the end of the period, the rate will normally revert to the SVR. Because monthly repayments do not change for the initial period, a fixed rate mortgage allows you to budget accurately, which is often important when a mortgage is first taken out. The only real disadvantage of a fixed rate mortgage is if interest rates fall during the mortgage term. You might then find yourself paying more than you would have done for a variable rate mortgage.

Capped Rate

The interest rate charged on a capped rate mortgage is guaranteed not to exceed a certain level, during the initial period (usually 2 years). In addition, monthly repayments will be reduced if interest rates fall during that initial period. However, in many cases, lenders may offer more competitive deals, with lower monthly repayments on fixed rate mortgages than they do on similar capped rate mortgages.

Other Types of Remortgage

Tracker Mortgage: The interest rate directly follows the Bank of England Minimum Lending Rate. This means that you are not dependent on the whim of the mortgage lender as to when its Standard Variable Rate (SVR) changes. Many financial institutions raise their mortgage rates immediately when the Bank of England raises its rate, but are much slower to follow when the rate falls.

Cashback Mortgage

This type of mortgage is usually charged at the SVR. It offers a cash lump sum to the borrower when the mortgage is taken out, which is useful if the borrower needs money to put towards a deposit, towards furnishing the property or has debts to repay.

Droplock Mortgage

A droplock mortgage is a type of tracker or discounted mortgage which includes the option to switch to a fixed rate mortgage, without penalty, during the initial term. This option is advantageous to the borrower if mortgage rates rise during the initial term of the mortgage.

Extra Mortgage Features

Besides the different ways that monthly repayments can be calculated, many mortgages incorporate additional features that are useful to some borrowers.

Flexible Mortgage: Subject to agreement with the mortgage provider, monthly repayments can be varied depending on the borrower's financial situation at the time.

Many financial institutions will allow overpayments (which will reduce the overall length of the mortgage term). In addition, some mortgages include options to allow:

• one-off lump sum payments;
• underpayments;
• payment holidays.

Borrowers who take advantage of underpaying or taking payment holidays should note that interest will continue to accrue. Consequently, higher repayments might be required later in the mortgage term; alternatively, the length of the mortgage term could increase.

Offset Mortgage

A flexible mortgage enables the borrower to offset the amount held in a current account or a savings account (with the lender) against the outstanding mortgage account. The amount of interest owing is calculated daily, based on the difference between the outstanding mortgage balance and the sum held in the linked account.

Current Account Mortgage

This type of flexible mortgage product is, in effect, a combined current account and mortgage account. Interest is calculated on the daily balance, so the overall amount of interest owed will depend on the amounts of money paid into the account and the amounts withdrawn.

Offset and current account mortgages will suit many borrowers who wish to make overpayments irregularly, when circumstances permit.

Remortgaging Procedures

The procedures involved in remortgaging are simpler and the costs are lower than for an initial property purchase with a mortgage.

An application for a remortgage is similar to one for an initial mortgage. Once the remortgage has been agreed in principle, a valuation will usually be required by the lender. However, if you remortgage with your current lender, a formal valuation may not be required, depending on the value of the property and the remortgage sum required. Even if you are changing mortgage lender, only a basic valuation survey should be required. This is because you are probably already in residence and therefore likely to have a pretty good idea of the current condition of the property.

In addition, the lender will usually expect confirmation that repayments have been made regularly on the previous mortgage. Just as for a regular mortgage, a remortgage lender will request details of the borrower’s employment position and monthly salary. Self-employed applicants will usually be asked to provide 3 years’ trading accounts to ensure that they receive a mortgage offer. Alternatively, they might have the option of choosing a self-certification mortgage.

If you are changing lenders, the new mortgage provider will insist that a solicitor or licensed conveyancer carries out local searches and confirms the title details of the property.

When the mortgage funds have been released by the new lender, the solicitor will repay the previous lender and inform the Land Registry of the changes that have taken place.

Remortgaging Costs

The one big potential cost that you avoid when remortgaging is Stamp Duty, because you already own the property.

However, you will become liable for some or all of the following costs:

• solicitor’s fees;
• valuation fees;
• mortgage provider’s arrangement fee;
• broker’s fee;
• Land Registry fee;
• early redemption penalty;
• discharge fee for existing mortgage.

Many lenders are not interested in providing low value remortgages, so if you are looking for a sum of less than £25,000, you might be restricted in your choice of possible mortgage provider.