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When you remortgage your property, you move your existing mortgage without moving to a new property. You look for a new loan – either with the same lender or a new one – that will pay off your existing loan.
There are several reasons why people remortgage their homes. If you took out your existing loan at a time when interest rates were high, you may now see the market is filled with new loans at far lower interest rates. Even if remortgaging meant paying an arrangement fee, you could still save a significant sum each month if you switched to a new deal. It is important to work out whether the savings gleaned from a switch would outweigh any arrangement fee you would need to pay. In some cases, it would not lead to savings.
Other people remortgage because they now have some equity in their property. This could be released to help with refurbishment costs or perhaps a new extension or similar work on the home. Another reason to remortgage might be to pay off debts elsewhere that have a high interest rate. Since mortgages have a much lower interest rate than unsecured loans, this could be a good way to reduce monthly payments and clear debts that are racking up a lot of monthly interest.
It is also common for people to remortgage when they reach the end of a current fixed rate deal. Moving onto a variable rate deal leaves the homeowner vulnerable to rises in the interest rate. That means looking for a new deal gives them more protection over the next few years.
Also known as a Capital and Interest mortgage. Your monthly payments pay off the interest and some of the capital borrowed. By the end of the term of your mortgage you will have paid off all your mortgage debt.
The term repayment type refers to the method used to pay back your mortgage. There are two repayment types – the repayment loan and the interest only loan.
If you choose a repayment mortgage, you pay a portion of the interest on the loan and a portion of the actual loan each month. To begin with, you’ll find you are paying mostly interest, but over time, you’ll gradually pay more of the actual loan back to the lender. By the end of the term, the amount owed reduces far more quickly, because you’re paying off mainly the capital by that stage.
The alternative is to get an interest only loan. The idea with this is that your monthly repayments will be smaller, since you’re not paying off any of the capital. You only pay the interest, hence the name for this repayment type. However, if you continued to pay off just the interest for the full term, you’d end up with the original capital amount remaining to be paid off once the term is completed. That’s why this type of loan requires you to have alternative options in place for paying off the capital at the end of the term. This could come from investments made elsewhere, although you must be sure the investments will grow enough to meet the amount required.
The most popular repayment type is the repayment mortgage. Monthly repayments may be pricier in this instance, but they ensure you will clear the entire sum by the end of the term.
Retention refers to holding back a portion of the agreed mortgage until any repairs the property requires are completed to the satisfaction of the lender. Retention is not very common, but it tends to occur when the property the buyer wishes to purchase has some issues that come to light in the survey. Those issues may be enough to bring down the value of the property.
For example, let’s assume a property is worth £300,000. You agree to provide a 10% deposit of £30,000 and the mortgage is agreed for £270,000. However, upon inspection by a surveyor, notable issues come to light that reduce its worth to £250,000. This means that while the mortgage is agreed for £270,000 the lender may only agree to release £250,000 and to retain the final £20,000 until the work that was highlighted is completed. They will typically put a deadline on this work, so you must make sure you can meet that deadline.
The two issues that arise from this scenario are that you’d need to find the extra cash to be able to buy the property with the smaller mortgage amount initially granted. You would also need to find the funds to resolve whatever issues there are with the property. As such, there are instances where would-be buyers withdraw from a property sale for financial reasons. Even if they have the cash, they may decide they do not want to move into a property that requires significant work on it at that stage.