The Importance Of Remortgaging

Property MortgageI personally believe that the quality and suitability of a homeowner’s mortgage is the second biggest factor that will ultimately determine the success of a property investment, especially with buy to let investors; the biggest factor being the market condition. However, you alone can’t control the market condition, but you alone can play a key role in determing the fate of your mortgage.

A mortgage is probably going to be the biggest financial responsibility you will take on, so it is a big deal. Forget your lousy electricity and water bills- you will still have a home even if failing to pay those. The majority of people will be at their mortgage lender’s mercy for 25years or there about; that’s a long time to be on your knees and it’s certainly not an enjoyable position to be in (some may protest to that claim).

What is remortgaging?

Remortgaging or what is also known as refinancing, is a process that replaces an existing mortgage policy with a new policy. It doesn’t have to necessarily be with a different lender, but most often is. If the lender is switched, the new lender repays the existing mortgage debt to the original loan provider. The borrower is then left with just one mortgage loan, repayable to the new lender.

Why do people remortgage?

Saving MoneyThe mortgage market is an extremely competitive field, lenders are continuously introducing new deals onto the market with the intentions of providing a more mouth-watering opportunity than their competitors. One of the reasons why people remortgage is to save money by obtaining mortgages that offer lower interest payments than their current mortgage plan.

Remortgaging can also serve to release equity in the borrower’s home. Equity is the difference between the market value of a home and the amount the borrower still owes on it. When an individual’s property increases in value, equity is built. Equity is also built when a borrower pays off some of the outstanding balance. However, I’m not advising people to remortgage to release equity; I’m advising people to remortgage in the attempt to get a better mortgage policy.

Remortgaging isn’t a big deal, in principle it’s no different than switching car insurance provider because you’ve found a better rate from an alternative insurer.

The biggest mistake borrowers make

It would be a sin not to take advantage of the competitive rates on the market. To simply sit on the same mortgage policy throughout the lifespan of your debt without looking for better deals is the biggest mistake you can make because it can cost you dearly. It will cost you in the sense that you could be paying a lot less interest over the duration of your mortgage.

There won’t always be better deals on the market, but during the period of 25years there will definitely be better mortgages available with better rates. So why not transfer over to a better mortgage lender which is offering a better rate? If you’re currently on a mortgage rate of 5.75%, switching to a new plan that is offering 5.50% can save you thousands. That’s only a 0.25% difference.

Example:
If you have an outstanding mortgage balance of £200,000 with a repayment plan of 5.75% interest rate over 25years, you’ll be paying £1272.92 (interest only £958.33) per month. If you remortgage to a plan which offers a 5.50% interest rate, you’ll be paying £1242.48 (interest only 916.66). Over 25years you’ll save £9,132 by switching to a 5.50% plan.

It’s not rocket science and that’s why it’s worth it.

Extra notes

  • Most mortgages have a tie in period, that period has to expire for you can remortgage without being penalised. The majority of lenders tie you in for 2-3years. If you’re not sure, check your policy or call your lender. You can get mortgages with no tie in, which is usually referred to as “no overhang”
  • Before switching to a new lender inform your current lender about your plans because they may offer you a better deal in an attempt to keep your custom.
  • Shopping around for a better mortgage is the key. Don’t limit yourself to one mortgage broker or a few high street building societies and banks; have a thorough look around.
  • Signing up with a new lender usually involves an admin fees from your new lender. Take that into consideration before agreeing to any new policy, because you might not be saving as much as you think.
  • Mortgage brokers are on a commission based salary. Every time a broker sells a mortgage policy they get a percentage from the lender, so don’t take their word as gospel. If they’re telling you they’re offering the best deal on the market…they’re probably not.
  • Make sure you understand every detail about your mortgage policy. A few of the important issues are the tie in periods, the penalties for early repayments and the interest rate changes. Soak it all in like a sponge before you sign anything.
  • It’s a good idea to start looking for better rates 3 months before your tie in period expires so everything is in place at ample time. Your new lender should handle all the documentation along with your broker, so the transition should be pretty straight forward.

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