Top 8 reasons to consider remortgaging
Amid these challenging times, with interest rates reaching their peak in recent years, the number 1 top reason to consider remortgaging for apparent reasons to contemplate remortgaging is to switch from a repayment mortgage to an interest-only mortgage. This is said in the wake that lenders proactively reach out to mortgagees, acknowledge their concerns about the escalating cost of living, and offer assistance. They have introduced various options to aid mortgagees in managing their mortgage payments during this difficult period. Therefore, it is advisable to assess your mortgage situation when you are on the verge of missing a payment. Acting sooner will give you a broader range of choices to navigate these circumstances successfully.
These lenders have signed up to the government’s Mortgage Charter. By signing up for the government’s Mortgage Charter, they have committed to collaborating closely with the government to ensure that mortgage customers receive the appropriate support and assistance they need. This initiative reflects our dedication to upholding the highest customer care and financial responsibility standards.
The Mortgage Charter is a set of principles and guidelines established by the government to promote transparency, fairness, and accountability in the mortgage industry. As a participant, they pledge to prioritise the well-being of our customers and provide them with the necessary tools and information to make informed decisions regarding their mortgages.
Transitioning from a repayment mortgage to an interest-only mortgage
A repayment mortgage, also known as a capital repayment mortgage, is a type of home loan where borrowers make regular monthly payments that consist of both interest and a portion of the principal. Over time, the outstanding balance reduces until the loan is fully repaid by the end of the mortgage term. On the other hand, an interest-only mortgage requires borrowers to pay only the interest on the loan each month without reducing the principal. This means that the borrower still owes the original loan amount at the end of the mortgage term.
Switching from a repayment mortgage to an interest-only mortgage is a significant financial decision with its own considerations and implications. It is essential to understand the reasons for this transition and carefully evaluate whether it aligns with your long-term financial goals.
- Reduced monthly payments: One of the primary reasons borrowers consider transitioning to an interest-only mortgage is the immediate reduction in monthly payments. Amid the ongoing cost of living crisis, many borrowers contemplate transitioning to an interest-only mortgage primarily because it offers an immediate reduction in monthly payments. The financial strain brought on by increasing living costs prompts homeowners to seek viable solutions that can ease their monthly budgetary pressures. Switching to an interest-only mortgage can provide a temporary reprieve, enabling borrowers to allocate more funds towards essential expenses and alleviate some financial burdens.
- Increased Disposable Income: With lower monthly payments, borrowers may have more disposable income at their disposal. This additional cash flow can be redirected towards other investments, such as contributing to retirement funds, building an emergency fund, or investing in other properties. However, ensuring that the freed-up funds are wisely utilised to achieve long-term financial stability is crucial.
- Investment Opportunities: Some borrowers choose interest-only mortgages to invest the money that would have gone towards the principal repayment. This strategy assumes that the investment returns will outpace the interest rate on the mortgage, resulting in potential profits. While this can be lucrative in a favourable investment climate, it also carries risks, as investment returns are not guaranteed.
- Extended Mortgage Term: Transitioning to an interest-only mortgage typically extends the length of the loan term. Since the principal balance remains unchanged, borrowers may need to carry the debt more extended than originally planned. This can result in higher overall interest costs over the life of the mortgage.
- Endowment or Investment Plans: Some borrowers initially opt for repayment mortgages combined with endowment or investment plans. The idea is that these plans will generate sufficient funds to repay the mortgage by the end of the term. However, if these investment vehicles underperform or do not yield the expected returns, borrowers might consider switching to an interest-only mortgage as a contingency plan.
- Mortgage Affordability and Future Risks: While interest-only mortgages offer reduced monthly payments in the short term, borrowers must consider potential future risks. If property values decrease or if they experience financial difficulties, the lack of principal repayment could leave them with a significant outstanding debt that exceeds the property’s value.
- Lender Approval and Affordability Assessments: Transitioning to an interest-only mortgage is subject to the approval of the lender, who will assess the borrower’s financial circumstances, affordability, and risk profile. Lenders may require evidence of robust investment plans or credible repayment strategies to ensure that borrowers can manage the mortgage effectively.
Here are the other top 7 reasons
- Expired Mortgage Deal: When your current mortgage deal is about to end, it’s crucial to take action. Many excellent mortgage deals typically last only two to five years. After this period, your lender may shift you to its standard variable rate (SVR), which tends to be significantly higher than your previous rate and prevailing market rates. To avoid being stuck on an expensive SVR, explore competitive remortgage options three to six months before your current deal ends.
- Securing a Better Interest Rate: Although some initial mortgage deals may incur early repayment charges (ERCs) and exit fees, it’s essential to consider remortgage to secure a better interest rate. The potential savings can be substantial, especially if you have a sizable mortgage debt. Utilise tools like the “Compare Two Mortgages Calculator” to assess the impact of a lower interest rate on your finances.
- Increased Property Value: If the value of your property has significantly risen since you obtained your mortgage, you might now qualify for lower interest rates due to a lower loan-to-value ratio. Calculate the potential savings by remortgaging under these circumstances.
- Concerns About Rising Interest Rates: Worried about interest rates going up? Before panicking, clarify whether the Bank of England base rate or the rates offered to new customers are predicted to rise. Depending on your mortgage type, the former can directly impact your mortgage payments. However, the latter might not necessarily affect your current mortgage rate.
- Overpayment Restrictions: If you wish to make larger mortgage overpayments to reduce your loan size and secure a more favourable rate, but your current lender restricts such options, remortgage may provide the solution. Evaluate any early repayment charges or exit fees you might face and compare them with the potential savings achieved through a lower interest rate on a new mortgage.
- Transition from Interest-Only to Repayment Mortgage: For opposite reasons to switching from repayment to interest only, if you want to switch from an interest-only mortgage to a repayment mortgage, you can often change with your existing lender without remortgaging. Additionally, consider converting part of your loan to capital repayment while retaining some on the interest-only deal, particularly if you have an underperforming endowment mortgage that could lead to a shortfall at the term’s end.
- Borrowing Additional Funds: Remortgaging can be a viable option if you need to borrow more money, especially if your current lender declines your request or offers unfavourable terms. Assess all associated fees to determine if remortgage is a cost-effective way to raise funds compared to other borrowing options. Commonly acceptable reasons for raising money through remortgaging include home improvements and debt consolidation.
Remember that each individual’s financial situation is unique, so it’s essential to consider the potential benefits and drawbacks of remortgaging based on your specific circumstances.
Transitioning from a repayment mortgage to an interest-only mortgage can provide short-term financial relief and increased cash flow. However, it also involves potential risks and long-term financial implications.
Before making this switch, borrowers should thoroughly evaluate their financial goals, investment plans, and risk tolerance. Seeking advice from a qualified mortgage broker is crucial to make an informed decision that aligns with individual circumstances and ensures financial stability in the long run. 
Choices, big or small, can influence not only your future but also that of your family. That’s precisely why we at Connect are here to assist you with our top 8 reasons to consider remortgaging.
