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How Remortgages Work
from: John WintersEveryone is familiar with a mortgage, an industry term for a
loan given to allow an individual to purchase a home. If a
mortgage is a loan taken on the value of your home and the
promise to pay a monthly rate in the future, a remortgage is
attaining a mortgage on your home or property after you have
already attained one.
Types of Remortgages
Remortgages come in a variety of arrangements and structures.
The most common is a Standard Variable Rate (SVR). A Standard
Variable Rate is a remortgage where the interest floats upon the
market rate. Even under this variable rate, however, the first
few months are typically fixed below market to entice you to
take on the loan.
The other major type of remortgage is a Fixed Rate Mortgage.
Fixed Rate Mortgages differ from SVR's insofar as the interest
rate is determined and remains flat from the beginning. This
type of loan is more dependable, insofar as you know exactly
what your payments will be from start to finish, but it is more
risky in that you may end up paying too much if rates fall (or
too little if they rise). As a result of this increased risk,
banks typically charge a slightly higher rate for fixed rate
remortgages.
There are also a wide variety of intermediary remortgaging
options. Lending options like capped rate, tracker, and droplock
loans are all variations on remortgages which blend some aspects
of variable rate and fixed rate mortgages.
Reasons to Remortgage
Remortgages are in many ways identical to a mortgage. It
involves you presenting your financial situation, your need, and
the collateral (your property) to a lender. Borrowers must
convey a strong case for why their loan is a good risk for the
lender. But unlike mortgages, where almost always the sole
reason for the loan is to enable you to purchase a home, the
reasons for taking a remortgage are quite varied.
Saving Money
The primary reason why individuals remortgage is to take
advantage of lowering interest rates. Many mortgage holders can
attain lower interest rates either because the prevailing
interest rate has falling across the lending industry, their
personal credit and financial situation has improved (meaning
that lenders can now have more confidence in them), or because
the equity they have placed in their home has reduced the total
exposure of the loan and made the loan less risky for investors.
Raising Money
The second major reason why people remortgage their property is
to raise significant amounts of cash quickly. The most popular
method of doing this is through cash out refinancing. This
essentially means attaining a new loan for the full amount of
your home. You can then use the money that you attain through
this loan to pay off the remaining portion of your existing home
loan and pocketing the difference.
Improving your Home
Another reason why people engage in remortgages is to free up
some cash for another venture. This typically involves taking
out a smaller loan against the value of your home, in effect a
second mortgage, which will give you money to improve your home.
Consolidate your Debts
The final major reason for remortgaging is to consolidate debts.
Often borrowers have accumulated debts from a variety of
different sources, home mortgage, credit cards, car loans, etc.
These loans can be difficult to keep up with and many often
carry high or varying interest rates. As a result many
individuals find significant savings as well as increased
convenience in compiling all of these loans into a single
remortgage loan.
About the author:
John Winters writes about a variety of financial topics. He
recommends www.accepted.co.uk to search for remortgages.
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