We are continually advised to shop around to get the best value for money when purchasing goods but the same mantra must be applied to the mortgage market. Existing homeowners must also be aware of the need to search for the best offer when they come to the end of their existing mortgage term to find the optimal deal for them. The process of moving onto a new deal at the end of a mortgage term is known as ‘remortgaging’.
Here, Rebekah Commane speaks to two experts who explain the process and how to get the most out of it.
The remortgage market has seen a considerable increase in uptake from those coming to the end of their current mortgage term. In fact, the latest figures from remortgage and conveyancing firm LMS found that gross remortgage lending was close to 30 per cent higher in October compared to the same month in 2012.
There are some very competitive rates currently available so if you’re coming to the end of your current deal, remortgaging is an option that should certainly be considered.
Andy Knee, managing director of LMS, explained that there is still a considerable appetite for remortgage products, despite the economic downturn.
“A remortgage can be used for a number of reasons – whether customers want to free up some extra capital or simply reduce their monthly mortgage payments,” Andy explained.
He said that those remortgaging in October released an average of £21,579, up 24.6 per cent compared to the same time last year and the highest sum since June and expects remortgaging to become increasingly popular next year.
David Copland, general manager, marketing & communications at Darlington Building Society told What Mortgage that the main reason homeowners look to remortgage is to get a cheaper monthly repayment than they are currently paying. “For some borrowers, however, the type of mortgage they have is also important so, for example, they may look to remortgage to secure a fixed rate of interest or a rate which tracks the Bank of England base rate in preference to their existing variable rate product.
“Typically a borrower will be attracted to a particular lender either directly or via a mortgage broker on the back of an attractive mortgage product. This product, whether it be a fixed rate, tracker or variable rate will normally be restricted to a term of between two to five years although there are a few products available with longer terms.
“Borrowers should not be content to stay on a lender’s standard variable rate of interest for any length of time unless they require the flexibility to repay the loan whenever they choose, without penalty.”
Best time to remortgage
When it comes to the best time to remortgage, Andy suggests that when coming to the end of your lender’s SVR (standard variable rate) is an ideal time to shop around; alternatively when your property has risen in value from the amount paid.
“Now that the Help to Buy mortgage guarantee scheme has been introduced, the attention of lenders will be increasingly drawn towards higher LTV (loan-to-value). This may in turn mean that they are less generous towards those with lower LTV products.
“Despite Mark Carney’s ‘Forward Guidance’, there is speculation over whether we will see a rise in interest rates sooner than originally anticipated. One thing is for sure, as soon as rates go up there will be a rush of activity, so those who are currently considering remortgaging, and are in a comfortable financial position to do so, should take advantage of the competitive deals currently available.”
The good rates to be found in the market of late are largely thanks to the government’s Funding for Lending Scheme (FLS) and has encouraged lenders to offer better rates, so now could be a good time to remortgage.
Parental help
When it comes to properties that have decreased in value, Andy explains that it is worth thinking outside the box, as the options may not be immediately obvious.
“For example, there are parents who are currently earning very little on their savings due to low interest rates, while their children are suffering from high interest rates on loans and credit cards.
“If a parent lends money from their savings direct to their child and negotiates an interest rate somewhere between what their savings would have been earning and what their child would have been charged on their loan, then both parties stand to benefit. By cutting out the middle man, parents can see a higher return on their money and children can get a more reasonable loan.
“Of course this depends on how much you trust your children to pay you the money back!”
Negative equity
However, for those in negative equity, remortgaging becomes more of a challenge.
“Unfortunately there are considerably fewer options available for those in negative equity, unless they can afford to pay down part of the loan. This may be sensible and pragmatic if it allows them to get a lower rate of interest on their mortgage, providing they are confident they will not need to access the money they have used to reduce the loan.
“Our experience shows that a significant number of people do reduce their borrowings when they remortgage.”
David Copland adds: “Unfortunately, there will be a number of borrowers where the LTV is greater than 100 per cent, i.e. the borrower is in negative equity. Such situations occur at a time when house values are falling yet the mortgage balance stays the same. Borrowers finding themselves in a negative equity situation will have limited or non-existent opportunities to remortgage to another lender and they are advised to speak to their current lender to see what options are available.”
Mortgage process
With regards to the process of securing a mortgage and the information required by lenders, Andy elaborated on how it works.
“A mortgage application can be performed through a number of different channels – online, over the phone, or in person at a bank. You will most likely need to provide information on your current loan, income amount and other monthly expenses.
“The bank or building society will also want to perform a credit history check to ensure that you don’t have any late payments or IVAs (Individual Voluntary Arrangements). Solicitors and lenders will also need to confirm your identity in most cases, especially if you are looking to release a large amount of equity.
“Once a valuation has been performed on your property to confirm you have enough equity to qualify for the mortgage and the lender has all the paperwork and documentation that they need, the approval and underwriting process can start.”
Buy-to-let mortgages
When it comes to buy-to-let investments (loans taken on properties to rent for a profit) it is possible to borrow against the property that you already own.
“The benefit of this is that interest rates on residential mortgages are usually lower than buy-to-let mortgages. Some people will even do both – they will borrow the deposit against their own home and the balance against the buy-to-let property,” Andy adds.
“However, whether doing this will generate enough capital to finance a second property will depend on what your current property is worth and how big your mortgage is. If you are looking into borrowing against your home as opposed to taking out a buy-to-let mortgage it is extremely important to carefully consider the tax implications.”
Easier than you think
David Copland says that remortgaging is much simpler than most people imagine.
“However, borrowers should do their homework first; they need to assess the value of their home compared to the size of the mortgage and this will give them their loan-to-value (LTV).
“If, for example, the LTV was 95 per cent it is pointless to approach a different lender who will only lend up to 80 per cent LTV. The lower the LTV, the greater choice the borrower will have in the remortgage market and the cheaper product they will get.
“Borrowers should also check whether their current lender will charge them a penalty if they redeem their mortgage and what fees and charges the new lender will charge them.
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