Remortgage to Restart the Mortgage Cycle on Fresh Terms

Posted by Nick Niesen on October 29th, 2010

Remortgage or refinance is a right that lenders of the yesteryear were afraid to offer to borrowers. In fact, remortgage was severely prohibited through clauses such as early repayment penalty. The logic was that by refinancing the borrowers were actually paying off the mortgage earlier. In this manner, the lenders lost a large amount in the form of interest.

Borrowers flinched at the early repayment penalty, but they continued with their demand to exercise the right to refinance. Loan providers accepted the fact that it will not be an easy task to continue binding the borrowers. Now the right is easily exercisable, except for a few loan providers who continue to include such outdated clauses in the mortgage contract.

Remortgage or refinance takes place when a borrower approaches a mortgage lender with a bargain to repay the existing mortgage. In exchange, the borrower takes up a new mortgage on fresh terms. The new mortgage may not necessarily benefit the borrower with cash. Different people will use remortgage option for different ends.

Cash will result particularly when the borrower has remortgaged to draw extra cash. In this form of remortgage, the borrower requests the loan provider to draw a new mortgage with the unpaid value of the existing mortgage and certain amount of cash. Since this method allows access to cash at a very low rate of interest, many people use this option, especially those who are cash short.

What others do is use remortgage as a debt consolidation option. Instead of drawing a part of the new mortgage as cash, people will include their debts into the existing mortgage. The new mortgage lender repays the debts along with the existing mortgage. Resources at the rate of mortgage when used for debt consolidation save several pounds of the borrower in terms of interest.

For people who are not lured by features like extra cash and debt consolidation, will find improvement in interest rate a good enough feature to take the dip, or go for remortgage. Taking a new mortgage on fresh terms means that a new interest rate regime will become functional. Mortgages taken years back will find the present interest rates very cheap. Remortgage will be viewed as a step to incorporate the present interest rates in the monthly repayments. Switching over to the new interest rates can bring down monthly repayments.

Search for alternative methods of repayment and other features that are missing in a traditional mortgage leads people to take up mortgages like interest only mortgage, pension mortgage, endowment mortgage, etc. The only drawback of an interest only mortgage is that a very large sum is required to be repaid at the end of the term. Instead of creating a repayment vehicle to repay the mortgage, it will be more beneficial to remortgage the existing mortgage, to give it a character similar to the traditional mortgages.

Mortgage refinancing or remortgage must be distinguished from a second mortgage. While there is a change of mortgage lender and mortgage terms in the case of refinance; second mortgage simply requires an inclusion of an extra debt in the existing mortgage. The mortgagor requests the existing mortgage holder to either offer cash or repay some debts. This sum is included in the existing mortgage and repaid through increased monthly instalments. Therefore, there is no change of mortgage lender and mortgage terms in case of second mortgage.

Remortgage helps to take advantage of the increase in equity in home. Loan providers welcome the boost in equity by offering a greater value of mortgage. Remortgage is also beneficial to people who have improved their credit status after taking the existing mortgage. As we all know, credit status has enough bearing on the terms at which mortgage is lent. A bad credit score at the time of taking mortgage will result in the borrower getting mortgage at expensive terms. Now, with an improvement in credit status, the borrower can demand a better term mortgage from another mortgage lender.

Remortgage is not without drawbacks. The most visible drawback is that repayment extends for another long period. The borrower needs to again spend on several fees like property valuation fees, legal fees, and administration and arrangement fees. This is excluding the early repayment penalty that some lenders will include for premature settlement of accounts.

The remortgage decision must be taken with sufficient prudence. There have been instances when borrowers have fallen trap to bad deal mortgages in order to escape an existing taxing mortgage. The key to a best deal mortgage is being informed. Independent financial advisors need to be consulted before taking the remortgage decision.