Remortgaging is a common financial move that homeowners make to save money or unlock equity. It involves switching your existing mortgage to a new deal, either with your current lender or a new one. While remortgaging can offer many benefits, such as lower interest rates or better terms, it’s essential to calculate whether the switch is truly worth it before moving forward.

Here’s a guide to help you understand how to calculate the potential savings or costs of remortgaging, ensuring you make a financially sound decision.

Why Consider Remortgaging?

Homeowners remortgage for several reasons, including:

• Securing a lower interest rate: If market rates have dropped since you took out your mortgage, remortgaging can reduce your monthly payments and save you money in the long term.
• Shortening or extending the loan term: You can adjust the length of your mortgage to fit your current financial situation. For example, shortening the term reduces interest costs, while extending it lowers monthly payments.
• Releasing equity: Remortgaging allows you to borrow more against your home’s value, freeing up cash for home improvements or other expenses.

However, remortgaging isn’t always the best move. You need to carefully weigh the potential savings against the costs involved in switching your mortgage.

How to Calculate the Costs of Remortgaging

While remortgaging can reduce your interest rate or provide other benefits, it often comes with fees and costs. Here are the primary expenses to consider when calculating if remortgaging is worth it:

1. Early Repayment Charges (ERCs): Many fixed-rate or discounted mortgages come with early repayment charges if you exit the deal before the term ends. ERCs are typically a percentage of the outstanding mortgage balance. For example, if your outstanding mortgage is £200,000 and the ERC is 2%, you would owe £4,000 to leave the deal early.
2. Arrangement Fees: New mortgage deals often come with arrangement fees, also known as product fees, charged by the lender for setting up the mortgage. These can range from £500 to £2,000, depending on the lender and the product.
3. Valuation and Legal Fees: A new mortgage deal may require a valuation of your home, which comes at a cost. Additionally, legal fees are required to complete the remortgaging process, though some lenders offer deals that include free legal work or cover the valuation cost.
4. Broker Fees: If you use a mortgage broker to find the best deal, you may also need to pay broker fees, although some brokers work on a commission basis paid by the lender.

These upfront costs need to be balanced against any potential savings. To determine if remortgaging is worth it, the savings from a lower interest rate or improved terms should outweigh the fees associated with the switch.

Calculating Potential Savings

To determine the financial benefit of remortgaging, follow these steps:

1. Identify Your Current Mortgage Terms: Start by reviewing the details of your current mortgage, including your outstanding balance, interest rate, and remaining term. You’ll need these figures to compare them with the new deal.
2. Estimate New Mortgage Terms: Use a remortgage calculator to input different scenarios based on available offers. Include the new interest rate, loan term, and any additional borrowing if you’re releasing equity. The calculator will help you estimate your new monthly payments and total interest costs.
3. Compare Monthly Payments: The primary benefit of remortgaging is often a reduction in monthly payments. By securing a lower interest rate, you may be able to lower your monthly costs significantly. For example, if you’re paying 4% interest on a £200,000 mortgage, reducing it to 3% could save you over £100 per month. Multiply these savings by the number of months left in your mortgage to get a clearer picture of the long-term benefits.
4. Calculate Long-Term Interest Savings: Beyond monthly savings, consider how much less interest you’ll pay over the life of the mortgage. For instance, reducing your interest rate by 1% could save you thousands of pounds over the course of a 25-year mortgage. However, if extending your loan term, keep in mind that you’ll pay more in interest overall, even if the monthly payments are lower.

Factoring in Your Financial Goals

When calculating if remortgaging is worth it, don’t forget to align the decision with your broader financial goals. If your goal is to pay off your mortgage sooner, shortening the term through remortgaging can help you do so while potentially reducing interest costs. On the other hand, if you need to lower your monthly payments due to budget constraints, extending the term may be a better option, even if it means paying more interest in the long run.

If you’re looking to release equity, make sure you understand the long-term implications. Borrowing more against your home can increase your debt, but it may also give you the financial flexibility you need for renovations or other investments.

Using a Remortgage Calculator

A remortgage calculator is a vital tool for determining if the switch is worth it. By entering the details of your current mortgage and comparing them with the terms of a new deal, you can see the total savings and costs over time. Be sure to include all the fees involved in remortgaging to get an accurate estimate.