Remortgaging — What you need to know

We are living in a time of mounting costs and increasing prices, and, being such a sizeable proportion of many’s outgoings, the decisions we take on our mortgages are intrinsic to financial management.

Many of us have little to no experience of rising interest rates, and the low interest rates we’re used to have created a received wisdom that variable- or tracker-rate mortgages are no worse — and occasionally better — than what fixed-rate products can offer.

We need to unlearn that understanding and fast. Times have changed and rising interest rates are not to be ignored.

The Two Options

When property is purchased, the process is usually facilitated through a mortgage. This will have an associated interest rate for, typically, a period of two, three, five, or even ten years, and when this ends, it will be replaced by the lender’s “standard variable rate” (SVR).

The SVR is usually higher, so the end of the fixed-rate term is the point at which borrowers should choose between staying with their current lender, via a “product transfer” rather than simply sliding onto the SVR, or remortgaging with another entity.

Product Transfer

Generally thought of as remortgaging with the same lender, a product transfer does differ from a bona fide remortgage in certain ways, both positive and negative.

As the fixed rate ends, lenders will contact “their” borrowers to offer products from their range, intent on securing borrowers’ ongoing business. The benefit of the product transfer is that there are no further checks of credit or income — the lender makes the offer as an extension of an existing relationship with the borrower — and the whole process can therefore take days rather than weeks.

However, the choice of products may seem limited, even if the range of high-street lenders such as Halifax, Santander and Nationwide is relatively representative of the market at large and there remains an option to borrow more money — subject to an underwriting process.

Remortgage

To a certain extent, remortgaging, as opposed to a product transfer, is like starting at square one. A new lender will require proof of identity, proof of address and evidence of income, and they will carry out a credit check on the prospective borrower. A sense of déjà vu will be experienced, especially for those who took out the original mortgage only recently.

That said, the extra admin may prove worthwhile. Choosing from the full market can result in a better rate, and this will be particularly advantageous in cases where additional funds are required, perhaps for property improvements.

Many checks required of a remortgage would come into play for a product transfer if the amount being borrowed is increased, so it makes sense to have more options if this is the case. And the length of the mortgage term may need adapting too, which a remortgage can incorporate.

Remortgaging will take longer, and may cost more in the short term — a bank or independent adviser will need to be called upon — but it’s a case of measuring whether the pros offset those headaches.

A Tailored Decision

The right fit will depend, as with so many things, on individual borrowers’ specific circumstances.

For anyone approaching the end of a mortgage product deal, a review of finances is recommended, and this will help to determine whether a product transfer is adequate or a remortgage is the better option.

For those whose circumstances are akin to what they were at the time of the original purchase and would like to keep things simple — and are offered an agreeable rate by their lender — the product transfer may well be fine.

If, however, circumstances have changed significantly, the greater number of options provided by a remortgage can be very attractive.

In the end, taking advice from a professional is sensible and timing is crucial. A product transfer or a remortgage, chosen correctly, can play a vital role in financial stability, particularly if secured at the right time.

Paul Anthony Roberts is a property investor and financial adviser with over 20 years of experience of property investing and providing financial services. Cain Lambert Financial Services provides mortgage and insurance solutions, specialising in adverse credit history and buying short lease investment property. Paul also provides coaching and mentoring for aspiring property investors.