If you are coming to the end of your existing mortgage deal you should consider remortgaging to potentially save a considerable amount on repayments. More and more homeowners have taken the decision to remortgage with some very competitive deals currently available.
Rebekah Commane spoke to industry experts, Andy Knee, managing director at LMS and Brian Murphy, head of lending at Mortgage Advice Bureau, about why remortgaging is so popular, options for those whose property has decreased in value and how to get the ball rolling.
Q. What are some of the main reasons why homeowners might consider remortgaging?
AK: Although the remortgage market has contracted since the economic downturn, there is still considerable consumer appetite for the products. A remortgage can allow customers to borrow additional cash on top of their original loan. This can be used for a variety of reasons, including paying off existing debts or funding home improvements.
Our latest Remortgage Report showed that those remortgaging in June were releasing an average of £22,615, which is the highest figure we have seen since January 2012. Although the number of people remortgaging continues to fluctuate month-on-month the amount of equity being released has increased steadily over the past three months.
BM: People often remortgage to take advantage of increasingly competitive remortgage rates or if they need to raise capital for a variety of reasons, such as releasing equity to fund a buy-to-let or a second home.
Q. When is the best time to look into remortgaging?
AK. If you are coming to the end of a mortgage deal and are about to move onto your lender’s SVR or if your property has risen in value since you bought it then remortgaging can provide a cost-effective way of borrowing large sums of money at lower rates of interest.
From next year the attention of lenders will be drawn towards higher LTVs because of the government’s new guarantee scheme; this may mean that they will be less generous towards those with lower LTV products.
As soon as interest rates rise there will be a rush of activity – so now that Mark Carney has confirmed that rates will remain stable for the time being, those currently considering remortgaging and are in a position to do so should take advantage of the competitive deals available.
BM: When a borrower is coming to the end of a benefit period rate it is always advisable to consider what options the market can offer them, especially if you are being moved onto a reversion rate, which could be a very uncompetitive SVR (Standard Variable Rate).
Currently interest rates across 2, 3 and 5 year fixed rates are at all time low levels.
Q. Why has remortgaging become so popular recently? Is the government’s Funding for Lending Scheme (FLS) contributing to this?
BM: Many borrowers, even those who have enjoyed low SVR or base rate tracker deals are increasingly looking at current rates and making the switch due to the value on offer, particularly for longer term rates.
FLS has clearly offered lenders a cheap source of funding and, since its launch last August, average fixed rates have fallen significantly by 1 per cent for 2, 3 and 5 year average fixed rates.
AK: The government’s Funding for Lending Scheme (FLS) has certainly played a significant part in encouraging competition between lenders. The result of this is that homeowners who are choosing to remortgage at the moment are able to take advantage of some excellent rates.
As the cost of living continues to rise and people notice their pockets feeling slightly lighter we expect the concept of remortgaging to become an attractive option to more and more people.
Q. What options are there for consumers who are looking to remortgage but find that the value of their property has decreased?
AK: Where a borrower has had their equity eroded this will depend directly on the realistic Loan to Value (LTV) that their mortgage represents relative to the value of their property.
If someone has a loan to value (LTV) of 90 per cent the options are more limited but currently more than 25 lenders offer remortgage products at this level but the number of products is relatively small.
However a borrower who only required a 75 per cent LTV remortgage would have more than 50 lenders to choose from and a significantly more products. We would always recommend that any borrower engage the expertise of an independent mortgage broker to ascertain the options at any given time.
BM: There is not a great deal of options but sometimes it is worth thinking outside of the box.
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!
Q. Are there any options for those in negative equity?
BM: For those who are in negative equity few options exist other than saving the funds needed to pay off any shortfall that may be generated following the sale of the property, relative to the size of the mortgage outstanding. Several lenders, including Nationwide, will allow an existing borrower to borrow up to 95 per cent of their next property purchase price if they are moving home – normally Nationwide only allow a borrower to take out up to 90 per cent of a property’s purchase price.
Also, Halifax can and do offer a range of “product transfer” rates to existing borrowers who have come to the end of benefit period mortgages and these include products for borrowers whose loan to value represents as much as 120 per cent of their property’s value. These products allow Halifax borrowers who are experiencing negative equity to lock into new replacement products at relatively competitive rates and provide the borrower with certainty around future repayment levels.
AK: There used to be a time when applying for a remortgage with negative equity was impossible, but that is no longer the case. In fact, an increasing number of companies are beginning to offer negative equity mortgage products in the hope of aiding the recovery of the UK property market.
However, this situation can seriously impact the kind of product you can purchase and the amount you will have to pay back. It is therefore essential that customers do thorough research or seek professional advice in order to assess what is going to be the best option for them.
Q. What sort of information will a lender need from consumers looking to remortgage?
BM: A lender will need to evidence a client’s income, which will include pay slips, a P60, basis of employment, etc.
For the self-employed, evidence of income, such as audit accounts and/or evidence from HMRC will be required.
Identity will need to be verified, such as registration on the electoral roll. The lender may require recent hard copy bank statements-some lenders do accept online downloaded versions).
They may want to see a current lender mortgage statement to confirm the continuity of repayments.
A credit search will be conducted to ascertain that there have been no unpaid debts.
The lender will need to know the purpose of the remortgage.
It’s always best to engage the services of an independent mortgage broker who can advise you of the most appropriate solution relative to your individual needs and circumstances.
AK: 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, which you will need to authorise.
Once a valuation has been performed on your property to confirm you have enough equity to qualify for the mortgage loan and the lender has all the paperwork and documentation that they need, the approval and underwriting process can start.
Q. Is remortgaging a popular option for those looking to move into buy-to-let investments?
AK: When looking into purchasing a buy-to-let property, there are two options – to take out a buy-to-let mortgage or borrow against the property that you already own. The benefit of the latter is that interest rates on residential mortgages are usually lower than buy-to-let mortgages.
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.
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