Remortgages are also known as refinancing. The technique of completing repayment of the principal on a mortgage by obtaining a new mortgage on the same property is used by borrowers for many different reasons. The term itself is mostly used in the United Kingdom, but the practice is used in other countries as well, including the United States and some European nations.
In practice, the borrower approaches a different lender from the original mortgage holder to finance the property. The payoff amount for the original loan is determined and the borrower agrees to the terms of the second loan. The first loan is paid off by the second lender and the borrower then has a new mortgage loan with new repayment terms, a new principal amount and presumably new interest rates.
A remortgage is not usually associated with purchasing a new property or with acquiring a second mortgage. Sometimes borrowers use the same lender and simply switch the mortgage from one type of mortgage to another. This is not technically a remortgage, since that implies different lenders. A remortgage removes one legal obligation and substitutes another obligation with an entirely new lender.
It can be considered as the process of effecting a transfer of a mortgage from lender to lender. Since the same property is being used as security for each mortgage, a remortgage cannot be considered as a new mortgage, but often the terms are so different from one lender to the next that it could be considered a totally different lending situation.
Homeowners will use the concept of remortgages for any of various reasons. Often a remortgage is sought because interest rates in the general economy are lower than when the original mortgage was created. Since the first mortgage holder wants to protect the income from the earlier higher rates on the original mortgage, they have no incentive to change the terms of the mortgage. Another lender though, under the new, lower interest rates will be willing to lend, because lending institutions must have funds working for them in order to earn any interest.
Borrowers may choose to remortgage in order to reduce the amount of monthly payments. The reduction in mortgage payment amounts can be due to lower interest rates, a longer repayment terms, or reduction of the principal amount because of payments made over the course of the first mortgage. Borrowers may also elect to remortgage in order to pay off the original mortgage sooner.
Again, this can be done by changing the interest amount, or the term of the mortgage. Sometimes a remortgage is sought in order to access capital. If the property has gained in equity over the course of the original mortgage, a remortgage can turn that equity into cash to be received at the time of obtaining the new mortgage. The cash can be used for college or university tuition and fees, for major remodeling on the property or for other major bills.
The advantage of remortgages are that they allow the borrower to keep the security of the existing property.