When you have taken out your first mortgage, the question of what remortgaging often comes up. How does it work and when can you consider it? The aim of this guide is to help take you through the basics of remortgaging so you know how it happens and what information you will need to see if you can remortgage your home. It will cover:
- Definition of a remortgage
- 4 easy steps to a remortgage
- What happens if you are declined a remortgage?
- Common questions
Definition of a remortgage
A remortgage is when you own a property and want to borrow money from a lender to takes a charge over it. This can happen with a property that you already own or with a one you own partially on an existing mortgage.
Standard mortgage swap
In a standard mortgage swap, you can simply change from one product to another with the same lender. This is just swapping you deal to get a better rate. If you are switching to a new mortgage provider, you will have to pay the money released to the old lender through a solicitor and the mortgage continues on the new terms. Most of the time, these will be available up to a 90% LTV (loan to value) ratio but some lenders go as high as 95% when you already have a mortgage with them.
Borrow more money
If the aim is to borrow more money, then the process is much the same. But the LTV depends on what you are borrowing it for as some lenders will put lower limits for certain uses than others. A few examples include:
- Debt consolidation – 80-90% LTV
- Home improvements – 80-90% LTV
- Mortgage swap without additional money – 90-95% LTV
- Buy electrical goods, furniture – 80-90% LTV
- Buy a self-build home – 75-80% LTV
- Buy a final share in a shared ownership – 90% LTV
Mortgage lenders sometimes won’t consider remortgage for things like investing in your business but there are others who may.
Why and how to remortgage
There are a few situations where remortgaging might be the right way to raise the cash or change lenders. It might be to save money on interest rates, change the terms of the mortgage or to make payments more affordable.
The actual process of remortgaging is quite simple for most homeowners and is based on personal information and how much equity you have.
- Establish your loan to value ratio
Working out your LTV means taking how much your house is worth. Divide the loan value of your current mortgage by the house value and multiply by 100. This is your current LTV and helps you work out the LTV of what you want to borrow.
- Ensure you can afford the new mortgage
Lenders have to make sure you can afford your new mortgage although criteria change between lenders. Most will take your annual income and times it by 4-5 to see the maximum they will lend you.
- Person 1 income £20K + £5K bonus
- Person 2 income £10K + £1K bonus
- Joint application income £36K
From this would be deducted any monthly outgoings for debts. So if this couple had £3,600 a month in loans and credit cards, this would make their net income £32,400. Four times this would mean they could borrow £129,600 while 5 times would be £162,000.
- Decide on the type of mortgage
There are various types of mortgage that your broker can walk through with you. Fixed is where the interest is fixed for a set time period, a variable is where the rate changes and there are other types that are less commonly used.
- Find the right deal
Armed with this information, you and your broker can look at the options in terms of the mortgage deals.
Some lenders are looking for standard applications with no bad credit or problems. Others have more relaxed criteria and will consider different situations. By working with a mortgage broker you can find the right deal for your details an what you want to borrow. Brokers usually have charges but deal with companies that you can’t reach directly so it is well worth using their services.
There may also be other fees for remortgaging to factor into your calculations. One example is a fee from the old mortgage company for paying it off early. You also want to look at the new interest rate if you are looking to save money as it might not be worth remortgaging while you are on a good, fixed rate. Again the broker can walk through all of this with you.
You can check with your bank although they only have a very limited number of options. And you can check comparison sites, but these only give general information, rates and deals but not if they would be relevant for you personally. And not all lenders are on these sites – many only work with brokers.
What happens if you are declined a remortgage?
There are reasons why a mortgage company may decline to give you a mortgage. It may be issued with bad credit such as
- Late payments on your existing mortgage
But there are lenders who will work with almost all of these situations and can offer a mortgage. These are rarely high street lenders and you probably haven’ heard of them but brokers will know which ones will consider a wider range of circumstances than others.
How easy is it to remortgage?
Depending on your details, it can be much easier to remortgage than to buy the house in the first place. There may be a need for a valuation but there’s no chain to deal with, house to buy and sell, contracts to exchange and fewer searches, if any. The legal process is much simpler and can take as little as 2 weeks, though typically around 4-6 weeks is average.
Can I remortgage with bad credit?
Yes, there are companies who will help with remortgages when you have bad credit. Your credit history is a record of your financial history for the last 6 years and this is interpreted by the lender based on their criteria. High street lenders don’t normally specialise in bad credit remortgages, but many less well-known lenders do.
Can I remortgage for buy to let?
There are products that allow you to remortgage to rent out your existing property or to buy another property to rent out. The maximum LTV for first-time landlords is usually around 75% and around 80% for experienced ones.
How much can I remortgage for?
The majority of lenders will go up to 90% LTV so if your property is worth £100K, then you can borrow up to £90K. And most look at your income and will go up to five times your income.
Can I remortgage with no equity?
Only your existing lender will consider a remortgage with no equity, but you may be able to switch to a better product with them.
Can I remortgage to pay off debt?
One of the most common reasons for remortgaging a house is to consolidate debt and cut down outgoings or reduce the amount of interest paid. Mortgages have lower interest rates, a set repayment schedule and can keep monthly outgoings down. The situation will depend on your equity and personal details like any remortgage.
When can I remortgage?
You can remortgage at any time, but most lenders will want you to have been living in the property for at least 6 months before you do. There are circumstances where they will consider this otherwise.
You don’t need to wait until your current mortgage deal runs out before you remortgage. So if you have a 3-year tracker, you don’t have to wait until that point to remortgage, you can look at it before this.
Can I get interest only remortgages?
You can get interest only remortgages but there are far fewer of them than there used to be. That’s because people have run into problems when they reach the end of the mortgage and can’t repay the loan. So the majority of times, you will need a repayment mortgage. If companies do offer interest-only mortgages, they are for a much smaller LTV, sometimes as low as 50%.
If you have an existing endowment police or stocks or shares, most lenders will consider you for interest-only mortgages. But savings in the bank, other investment bonds or sale of the property will not be considered by many lenders. The same applies to a pension lump sum though some will consider it if you have another property to sell and pay off the loan at the end of the period.