Owning a home is a lifelong goal for most people. The thought of standing in the middle of your own yard, one that you can decide how to landscape each summer week, makes anyone beam with pride. Owning your own home does not come without sacrifices either. First there is a down payment, or deposit, which usually equals 20 to 30% of the total selling price of the home. Next you have the all-important decisions of how to spice up each room in the house. The paint colors will have to be chosen, fixtures on the wall need to be closely scrutinized, and don’t forget the never-ending debate about the bathroom faucet. These are just some of the things which will be discussed over dinner for the first three weeks after moving in. Now, fast forward three years. The house has appreciated in value. You have built up some home equity through maintaining regular monthly mortgage payments. And now, the question of a remortgage comes up. Keeping in mind, your home is your greatest asset. It is also your biggest investment, ever. The hard earned pounds you put into the monthly mortgage to live there is more than just a payment. It is a deposit into the biggest piggy bank you will ever own. It is time to make smart financial decisions about a remortgage. Let’s take a look at all the options available, so you are able to optimize the effects of one of the most valuable, under-used lending tools out there.
Remortgage Broker or Bank
Deciding who to work with on your remortgage sets the tone for the entire remortgage experience. Many homeowners use brokers because they are able to obtain quotes from multiple lenders, compare and contrast for the best possible deal, and can still work with you if you are turned down by a bank. The main difference is that bankers typically have a prior relationship with the homeowner.
When choosing the negotiating partner for your remortgage, keep in mind that a bank will provide information about one of their deals in hopes that it is appealing to you. A broker will work like a middleman and try to discover which deal will fit best into your financial plan. It is common for homeowners to assume that a broker will be more costly. In reality, many brokers are able to be competitive with remortgage deals offered by banks. At this point, it pays to be a detailed investigator and ask as many questions as possible. The more effort you put into the remortgage process, the more successful it will be overall.
Types of Remortgages
This is the point in the process when it typically pays to be set up with a broker. There are multiple types of remortgages available. A detailed description of each given by a professional will go a long way in helping you decide which type will help you reach your remortgage goals.
Fixed Rate vs Variable Rate
A fixed rate remortgage is a remortgage in which the interest rate is fixed, or stays the same, for the time frame agreed upon during negotiation. The fixed rate remortgage is perfect for those homeowners who want to know the monthly mortgage will never change. Regardless of what changes the base rate goes through, the fixed rate remortgage does not change.
In contrast, the variable rate mortgage changes as the base rate changes. This type of remortgage is perfect for the risk-takers. This type of remortgage can cost, or save thousands of pounds over the course of the loan because it is directly tied to a bank base rate which is established on initial discussion of the remortgage loan. This can end up being one of the most difficult decisions to be made, because the lender will usually require at least a one year commitment at that interest rate. A fixed rate interest rate deal will also require a one year commitment.
Bad Credit
If credit problems have plagued you in the past, think carefully about going the remortgage route. It can go either way- to help you in repairing bad credit, or just do more damage to an already bad situation. Remember, your credit score will be a great indicator of how good of a deal you are offered. If you go into the application process knowing you have suspect credit, don’t be surprised at what the lender pulls out of the drawer and calls it the best deal possible. It is sometimes better to spend some time building a better credit history, than going in knowing it will not produce the outcome you are looking for.
Interest Only
This is the only type of remortgage loan product available that does not require the principal to be paid with the monthly payment, only the interest. This type of loan is extremely risky because the entire principal amount is due at the end of the loan term. Serious financial problems can ensue if you are not ready to take on a large payment amount at the end. The logic behind this type of remortgage is that you will make investments over the term of the loan which will generate far more than is required at the end. Think long and hard about committing yourself to this type of a remortgage. No equity is built into the home with an interest only remortgage either.
Buy to Let
A buy to let remortgage can produce excellent results if researched and handled the right way. A buy to let remortgage gives you the ability to purchase property with a remortgage that can pay you dividends for as long as you own the purchased property. This type of remortgage is considered a great way to protect yourself against market volatility, because it gives you the potential of building an emergency fund. Owning rental property is also a wise idea because finding tenants is usually not a problem.
Equity Release
For individuals 56 years of age or older, this type of remortgage can be quite beneficial. It allows an equity release to take place and the funds to be used for anything. Most people consider a dream holiday, a new car, or just a better way of life. Be careful with this type of remortgage if you are planning on passing your property to someone else when you are gone, though. Essentially, when equity is taken out of a property, the value of that property suffers by the same amount.
Discounted Variable Rate
Another remortgage considered of higher risk is the discounted variable rate remortgage. For a predetermined amount of time, the borrower gets a discount with this remortgage off the standard variable rate remortgage the lender is offering. After the time limit is up, the remortgage payment returns to the variable rate amount – thus the risky part. This remortgage type can be a saver, but it will also usually require an arrangement fee, so be careful.
Joint Tenants
This is a type of remortgage considered by those who own the property as a partnership. This remortgage gives the holders the right to sell their percentage of the property to someone else. This type of remortgage gains more popularity as each year passes.
Tracker Rate
A tracker rate remortgage is directly tied to the Bank of England’s base rate. If you are willing to risk, then there can be nice reward with this type of remortgage. As the base rate goes up the consequences can be catastrophic, so again, be careful.
Offset
Having a savings account in the same location that holds your mortgage has its advantages with this type of remortgage. For example, if you are paying on a 150,000 pound loan and have 20,000 pounds in a savings account, you will only be paying interest each month on the 130,000 pound difference. The name of the game on this remortgage is save, save, save.
Capped Rate
A capped rate remortgage provides the benefits of both a tracker remortgage and a fixed rate remortgage. The capped rate is tied to the Bank of England base rate, but has a cap to the maximum amount the interest rate can rise to.
Finally, a remortgage can be an invaluable tool in helping you reach your financial goals. Meeting with a credible remortgage specialist is the first step. The options can then be laid out in front of you for consideration. Attend the meeting prepared with financial records, a good credit rating, and an open mind. The path to a successful remortgage plan is closer than you think.
