What Are the Risks of Remortgaging

Remortgaging can be an attractive option for homeowners looking to secure better interest rates, release equity, or consolidate debt. However, it's crucial to understand the potential risks involved before making a decision. This article delves into the various risks associated with remortgaging, such as early repayment charges, extended loan terms, and negative equity. By exploring these risks, homeowners can make informed decisions and determine whether remortgaging is the right choice for their financial situation.

Understanding the Risks of Remortgaging

Remortgaging can be an effective way to save money or raise funds, but it also comes with potential risks. It's essential to understand these risks before deciding to remortgage your property.

1. Early Repayment Charges

When you remortgage, you essentially pay off your existing mortgage and switch to a new one. If you're still within the initial fixed or discounted rate period of your current mortgage, you might face early repayment charges (ERCs). These charges can be quite substantial, often ranging from 1% to 5% of your outstanding mortgage balance.

2. Higher Interest Rates

While remortgaging can potentially lower your monthly payments, there's also a risk that you could end up with a higher interest rate. This could happen if your credit score has dropped since you took out your original mortgage, or if interest rates have risen in the market.

3. Extending Your Mortgage Term

If you remortgage and extend your mortgage term, you could end up paying more interest over the life of the loan, even if your monthly payments decrease. This is because you'll be paying interest for a longer period. It's crucial to consider the total cost of the mortgage, not just the monthly payments.

4. Valuation and Legal Fees

Remortgaging involves costs such as valuation and legal fees. Some lenders might offer to cover these costs as part of the remortgaging deal, but others might not. These fees can add up, potentially offsetting some of the savings from remortgaging.

5. Negative Equity

If property prices fall, there's a risk that you could end up in negative equity, where the value of your home is less than the amount you owe on your mortgage. This risk is particularly relevant if you're remortgaging to borrow more money against your home.

FAQ

What are the potential financial risks of remortgaging?

One of the key risks of remortgaging is the potential for increased debt. If you're not careful, you could end up borrowing more money than you can comfortably repay. This could lead to financial strain or even the loss of your home if you can't keep up with the repayments. There's also the risk of early repayment charges. If you remortgage before your current deal ends, you might have to pay a penalty, which can be a significant amount. Lastly, if the value of your property has decreased, you might fall into negative equity, where you owe more than your property is worth.

How can remortgaging affect my credit rating?

When you apply for a remortgage, the lender will conduct a hard credit check. This can temporarily lower your credit score. If you apply for multiple remortgages in a short period of time, it can have a more significant impact on your credit rating. Additionally, if you miss any payments on your new mortgage, this can have a severe impact on your credit score, making it harder for you to get credit in the future.

What are the risks associated with variable rate remortgages?

With a variable rate remortgage, your monthly payments can increase or decrease in line with changes to the lender's standard variable rate (SVR). This can make it harder to budget, as your mortgage payments can fluctuate. If interest rates rise significantly, you could find your monthly payments becoming unaffordable, leading to financial strain.

Can remortgaging affect my job prospects?

While remortgaging itself doesn't directly impact your job prospects, financial stress caused by unmanageable mortgage payments could potentially affect your performance at work. However, if your remortgaging application is denied due to a poor credit rating, this could indirectly affect certain job prospects, particularly those in financial or sensitive roles, as some employers carry out credit checks as part of their hiring process.