Remortgaging = using a new mortgage loan to pay off an older mortgage loan, with the same real estate as collateral
Remortgaging is a type of debt refinancing common in countries where home mortgage loans tend to be fixed-rate loans, i.e. loans where the interest rate is fíxed for the duration of the loan. With an adjustable-rate loan, the borrower can re-negotiate the interest rate many times during the lifespan of the loan. With a fixed-rate loan, this is not possible, so remortgaging is used instead. When you remortgage, the old fixed-rate loan is payed off in full and you obtain a new mortgage loan with other terms and conditions than your original loan.
There are many reasons why a borrower can wish to remortgage instead of sticking with the old mortgage loan. Circumstances can have changed and I’m now stuck with poorer terms and conditions for my current mortgage loan than what I could negotiated if I applied for a new mortgage loans. This can be due to general circumstances (lower general interest rates) or individual factors (higher credit worthiness, smaller debt in relation to the value of the collateral, etc).
One very common reason to remortgage is to bring the nominal interest rate down, but it is important to remember that this isn’t the only cost associated with the loan. Always take a comprehensive look at your situation and look at costs such as billing fees, annual fixed-fees, and more.
Once you have managed to lower the costs associated with your mortgage loan (nominal interest, fees, etc) you can either use this to bring the size of your monthly payments down, or you can keep paying just as before, thus accelerating the reayment pace for the principal since more money will go toward paying down the principal than before.
Sometimes, moving to a new lender is necessary to get the best possible terms and conditions. In such a situation, the remortgaging will involve borrowing money from the new lender to pay back your old lender.
Sometimes, remortgaging is carried out because the borrower wish to switch from a fixed-rate mortgage loan to an adjustable-rate mortgage loan, or the other way around.
If your home is worth more than the debt tied to it, you have positive home equity. This positive home equity can be used as collateral for a second mortgage loan, also known as a home equity loan. The second mortgage loan will be “on top” of the first mortgage loan, and the first mortgage lender will have priority over the second mortgage lender if the home is sold to repay the debts.
In some situations, you will be able to negotiate a better deal if you do a refinancing of your old mortgage loan and switch it for a new larger mortgage loan instead of keeping the old loan and adding a second loan on top. This is why we sometimes see borrowers refinancing instead of applying for a second mortgage loan.
Remortgaging can require you to pay certain costs. Here are a few examples of fees to look out for:
When you compare various remortgaging alternatives, always keep an eye on the costs. Even remortgaging without changing from one lender to another may incur costs.
In some situations, it might be possible for you to negotiate down some of the costs or have the lender take care of them completely.
Here are a few examples of things that will make it easier for you to negotiate your way to excellent terms and conditions when you remortgage:
Read up on what you can do to improve your credit score / credit report. Some people erroneously think that they only way to get a high credit score / good credit report is to “make a lot of money” and “have a low debt-to-income ratio”. In reality, there are probably a lot of little adjustments that you could do that would notably improve your credit score / report.
If you have a solid employment history, make sure you mention that and have the documentation to back up your claim if necessary.
You will be in a better position to negotiate if the debt associated with your home is low compared to the market valuation of the home. Take good care of your home and carry out necessary maintenance, and do smart renovations / changes / additions that bring up the market value.
Before you put yourself on the spot in a negotiation situation, make sure you know plenty about the options. You can for instance contact several different lenders and see what terms and conditions they are willing to offer you right off the bat. With that information known to you, it will be easier for you to negotiate successfully – or walk away if this particular lender doesn’t give you a good enough offer.
Having a co-borrower can significantly improve your position, especially if it is a co-borrower with a high credit score and solid employment history. Please note however that some potential co-borrowers, such as an individual with a horrible credit score, is likely to drag you down rather than boost you up.