The UK remortgage sector is huge with traditional lenders, private banks and niche lenders all vying for your business. While historically traditional lenders, such as the high street banks, dominated the UK mortgage market, competition has increased dramatically of late.
In the aftermath of the 2008/9 US mortgage crisis, we saw many traditional UK mortgage lenders retreat from the marketplace to rebuild their balance sheets.
We also saw UK authorities stepping forward with new regulations announced by the Financial Conduct Authority in an attempt to avoid a repeat of the 2008/9 economic crisis. Tougher lending criteria restricted the range of products traditional lenders were able to offer.
This left a void which has been very quickly filled by private banks, niche lenders more recently crowdfunding platforms. The ever-increasing competition in the UK mortgage market has been welcomed by borrowers with traditional profit margins under constant pressure.
When it comes to remortgages, there are numerous benefits and reasons for refinancing your property.
Over the years, a combination of increasing property prices and paying down your mortgage can create significant equity in your home.
There are now various ways in which you can release equity from your property which include:-
A traditional remortgage is a very useful way of releasing equity from your property, although it must be done within the constraints of your finances.
As with any type of remortgage, you will still need to pass the affordability test to ensure that you can maintain repayments going forward.
In recent times we have seen a significant increase in the number of lifetime mortgages which allow mature homeowners to release equity.
The remortgage is structured in such a way that there are no monthly repayments and interest is rolled up until the property is eventually sold.
When the homeowner either moves into full-time care, or they die, the property will be sold and the lifetime mortgage paid off.
Home Reversion Scheme
This is another product aimed at older homeowners looking to release capital from their home with minimal or no repayments. Broadly speaking, this is a type of refinancing in that the homeowner will sell a share of their property to a home reversion company.
The home reversion company will hand over a lump sum in exchange for a share of the property – but this will be valued at less than the market rate. In exchange, homeowners will live rent-free in the property for the duration of their life.
Upon death or a move into full-time care, the property would be sold with the home reversion company receiving their share of proceeds.
Raise Funds for Investment
As remortgage interest rates tend to be fairly competitive, they can be a useful source of funds for investment elsewhere.
Some of the more common investment opportunities include:-
- Additional property assets
- Stock market investments
- Other investment opportunities
The idea is simple, by releasing equity from your property at a relatively modest interest rate you would seek to work that money at a higher rate.
Remortgaging buy to let properties to release equity to acquire additional buy to let properties is a useful way of leveraging assets to increase your portfolio.
The equity release covers part of the next property purchase deposit and repeating the process time and time again is a useful way of working assets.
Change in a Financial Situation
Whenever you apply for a mortgage, assuming you are successful, you will be offered funds based on your financial situation at that moment in time.
This may take in the traditional maximum 4.5 times income multiple together with a broad range of LTV ratios based upon your specific financial scenario.
As a consequence, if you experience a significant improvement in your financial situation this may bring about additional opportunities:-
- To raise more capital
- Increase the LTV ratio
- Reduce the headline interest rate
- Shorten your mortgage term
The simple fact is that an improvement in your financial situation would likely see you deemed “less risky” by mortgage lenders.
The lower the risk, the lower the interest rate, and you may be able to negotiate more favourable overall terms.
In essence, the more financially secure you are, the more attractive you are to lenders. It really is as simple as that!
Raise Funds for Business
If you are looking to expand your business or perhaps you have short-term cash flow issues, it can sometimes be difficult to lend money in a corporate capacity. The corporate mortgage market is very different from the retail mortgage market.
Therefore, remortgaging your home could help to raise funds to reinvest in your business at relatively competitive rates.
Obviously, the actual remortgage interest rate will depend upon your personal financial situation but, all things being equal, remortgage rates tend to be significantly lower than those for business loans.
There may even be an opportunity to inject additional capital into your business in the form of a loan on which you would receive interest.
Raising funds for a business does not necessarily need to be against a background of troubled cash flow problems. You may have an opportunity to acquire an additional business, expand your operations or indeed refinance your company debt at lower levels.
While people recommend “not mixing business and personal lives” this is one of those situations where it can prove financially beneficial to do so.
The vast majority of individuals in the UK will have some form of debt with the likes of credit cards, personal loans, overdrafts and store cards very popular. Unexpected bills and short-term cash flow issues can impact your ability to pay and often leave you with high-interest debt.
The opportunity to release equity from your property, and uses this to consolidate your debts, on a lower interest rate makes perfect sense. If you consider this, equity in your property is doing nothing, is creating no income, and there is no guarantee of further capital appreciation.
High-interest debts such as those listed above often charge rates in excess of 20%. Indeed, recent changes in the overdraft regulations have seen many banks increase their annual rates to more than 40%.
So, it makes perfect sense to pursue a debt consolidation strategy by releasing capital from your property via a remortgage.
As with any remortgage, you would still need to pass the affordability test, but if the eventual aim is to reduce your monthly payments this in itself will improve your affordability factor.
We can only imagine the number of people in the UK struggling with high-interest debt while holding significant equity in their homes.
Increase in Property Value
An increase in the value of your home will often present an opportunity to remortgage and even release an element of capital.
If we take the following example:-
- Property purchase: £100,000
- Date of acquisition: 1997
- Mortgage funding: £70,000
- Deposit: £30,000
- Property revaluation 2020: £250,000
- Outstanding mortgage: £70,000
- Equity: £180,000
If we work on the same LTV ratio from the original mortgage, 70% in this example, this equates to a remortgage of £175,000.
The outstanding mortgage of £70,000 will be paid out of these funds leaving a net £105,000 of funds released.
As well as the equity release of £105,000, the element of equity remaining in the property has also increased from £30,000 (the initial deposit) to £75,000.
Pay for Home Improvements
It is interesting to note that during buoyant economies or recession, there is still a constant flow of interest in home improvements.
This is one of the more popular reasons to remortgage your property, withdraw a degree of equity to fund improvements which will then, hopefully, increase the value of your property.
As we will show, there may also be additional opportunities to benefit from the increased value.
If we take a look at the following example using a mortgage-free property:-
- Property value: £100,000
- Cost of home improvements: £30,000
- LTV ratio: 30%
This is a relatively conservative LTV ratio which is based upon the cost of home improvement as opposed to maximising equity release.
So let us take a look at the impact of the home improvements:-
- Revised property value: £150,000
- Outstanding mortgage: £30,000
- Remortgage on 30% LTV: £45,000
In this instance, the value of the property has increased by £50,000 against the cost of the improvements which stood at £30,000.
As a consequence, using the same LTV ratio, the homeowner would be able to remortgage at a later date raising £45,000. After paying off the original home improvement mortgage, this leaves a net £15,000 equity release.
It will depend upon the type of improvements you carry out, but this level of increase can look conservative in some cases.
While much of the focus on remortgaging a property seems to be equity release, there are other benefits to consider. One such benefit is improved interest rates as a consequence of market movements and a changing economic environment.
As you grow older, your income should naturally improve as your career progresses, and you may also be able to put aside savings and investments. In many cases, you can have the double whammy of improvement in general mortgage market rates, compared to when you took out the initial mortgage and an improvement in your risk factor.
If we look at base rates, which dictate the general direction of mortgage rates, they currently stand at historic lows.
As a consequence, even if your financial situation has remained constant, there would likely be opportunities to switch to lower mortgage interest rates.
In some cases, your original mortgage may be linked to the standard variable rate of the lender with no benefit from the many attractive fixed-rate deals.
So, it certainly pays to keep an eye on interest rates as there may be potential to reduce your monthly payments via a remortgage.
A Current Deal About to End
If you have looked into mortgage rates in detail, you will see that the vast majority of fixed-rate deals tend to have a term of between three years and five years.
While this obviously gives mortgage holders a degree of predictability with regards to their future mortgage repayments, what happens when the fixed-rate deal expires?
As a rule of thumb, when any mortgage interest rate deal comes to a close, the mortgagee will automatically be transferred to the lender’s standard variable rate (SVR).
While it would obviously depend upon changes during the fixed-rate period, a switch to the SVR could see a significant increase in mortgage repayments. Even if this was not the case, and base rates have been volatile in recent years, the lender would normally have an array of fixed-rate deals and discounts on the SVR.
If you don’t enquire about switching to a new fixed-rate deal (or any other type of promotional rate), or pursue opportunities elsewhere, there will be a financial cost.
So, whether you look at remortgaging with a different lender or take advantage of any competitive fixed-rate deals offered by your existing lender, you should seriously consider refinancing your home.
Also, many people make the mistake of thinking it takes a couple of days to complete – a remortgage can take weeks. So, you should start the remortgage application process well in advance of the expiry of your existing fixed-rate deal.
That way, when your existing fixed-rate deal expires you will be automatically switched to your new deal.
Interest Rate Trend
Historically UK base rates had a relatively tight range which often made it marginal whether it was sensible to remortgage with the aim of improving your headline rate. However, since the US mortgage crash of 2008/9 base rates in the UK have remained at historic lows.
While it is worth noting that mortgage rates will follow the general trend of base rates, they won’t move on a like-for-like basis. At this moment in time, the UK base rate stands at 0.1% with mortgage rates also trending at historic lows.
Even though UK base rates have been around this level for most of the last decade, there will come a point when they will return to more “normal” levels.
As a consequence, more and more people are now looking to remortgage their properties purely as a means of locking in, for example, a fixed-rate based on the current level of base rates.
In effect, they are looking to take advantage of the current base rate before interest rates rebound. While many experts believe that UK base rates will remain around the current level for many years to come, nobody knows for sure.
The only base rates and mortgage rates, including fixed-rate and promotional offers that we can guarantee, are the ones before us today.
So, if remortgaging at current levels leads to a significant reduction in monthly repayments, surely it is worth considering?
Switching From Interest-Only to a Repayment Mortgage
As a consequence of the mortgage annuity scandal, which saw huge compensation payouts as a consequence of “misleading advice” back in the 1990s, there is a greater emphasis on repayment mortgages today as opposed interest only.
That said; there is still some interest-only mortgage options available which offer the opportunity to increase short-term cash flow but with larger long term liabilities. The structure of an interest-only mortgage means you only pay the interest on a monthly basis and pay off the original capital at the end of your mortgage.
The situation with repayment mortgages is very different, as the higher monthly payment includes a degree of capital and interest.
It is perfectly conceivable that as your financial situation improves perhaps, you have more disposable income. You may look to switch from an interest-only mortgage to a repayment mortgage.
There are numerous benefits, assuming you can afford the increased payments, such as an overall reduction in interest payments and no large repayment at the end of your mortgage. As you repay part of the original capital month by month, this reduces the level of debt on which the interest is calculated.
There may also be the opportunity to reduce the term when remortgaging, although this would again depend upon the level of payments you could afford.
A traditional mortgage tends to be between 20 and 25 years in duration and is obviously a significant financial commitment. Your original mortgage application would be based upon your finances at the time with limited visibility regarding long-term income.
It is impossible to predict the future and any potential increase in your finances or receipt of lump-sum payments. However, at some point, you may wish to make some overpayments towards your mortgage, thereby reducing the mortgage capital and interest charged.
Unfortunately, not all mortgage arrangements will encourage or even allow overpayments with many, including punitive fees. Mortgages with this type of penalty clause tend to be few and far between in the current market, but they do still exist.
A restriction in the ability to make overpayments has seen many people remortgaging their homes. They may not necessarily see any improvement in the mortgage interest rate but the option to make penalty-free future overpayments can be important.
Such is the competition in the UK mortgage market today that a competent mortgage broker should be able to arrange a remortgage with no overpayment fees.
Regular overpayments can significantly reduce the term of your mortgage, thereby having a long-term positive impact on your cash flow.
Even though offset mortgages have been around for some time, they are not as popular as many people thought they would be. The concept of an offset mortgage is fairly basic, your current account, savings account and mortgage account are all held with the same bank.
As interest payments are calculated on outstanding capital, there is the ability to use both savings and regular income to reduce this, even temporarily.
The idea is simple; you would transfer your savings and a portion of your monthly income into an offset account. Your outstanding mortgage would be calculated net of the additional funding in your offset account.
So for example, you may have an outstanding mortgage of £50,000 and £2000 in your offset account, resulting in a net outstanding mortgage of £48,000. If for example 2 weeks later you withdrew £1000 from your offset account this would increase your outstanding mortgage to £49,000. So what is the benefit?
For a period of time, your interest would be calculated on a net outstanding mortgage of £48,000 and for a different period of time on an outstanding mortgage of £49,000.
As you can see, there is the potential to reduce interest charges even in the short-term by using an offset account to utilise fund which you don’t immediately require.
Over the years, we have seen significant volatility in LTV ratios rising as high as 110% in the 1990s to below 50% for those with a troubled credit history. Therefore, it is not inconceivable that even if all other factors remain constant, you may actually be able to borrow more money against your property and withdraw equity.
For example, on a £100,000 property, an improvement in the LTV ratio from 60% to 80% equates to an additional £20,000. When you consider that the average property in the UK is now valued at in excess of £200,000, there is the opportunity to raise significant capital.
Obviously, you still need to pass the affordability test, but those deemed to be less risky would have greater access to higher LTV ratios.
Average Monthly Savings
When looking to remortgage, it is difficult to put a figure on average monthly savings as this will depend on so many different factors. However, the following table will give you an idea of potential interest savings.
In this example, we have used fixed rates for the full term of a mortgage just to give you an idea.
|Mortgage||Term||Rate A||Total Interest Rate||Rate B||Total Interest Paid||Difference|
If you take a step back and look at the situation from a distance, if you were able to remortgage on a new fixed-rate as your current fixed-rate term came to an end, you would always undercut the standard variable rate.
As a consequence, whether reducing your mortgage interest rate by 0.5% or even 1%, the long-term savings can be huge.
Getting a Quick Remortgage Quote
In days gone by, you would need to contact mortgage lenders to obtain a quote for remortgaging – which could often be time-consuming. The Internet has changed the way we manage our finances with online remortgage calculators allowing you to compare and contrast different rates, different terms and different levels of funding.
There are also mortgage calculators which will review your finances and indicate what level of mortgage repayments, if any, you could afford. This all before you even approach a mortgage broker or mortgage lender!
The fact that you can carry out these comparisons in the comfort of your own home, 24 hours a day, seven days a week, is something that we now take for granted.
However, it was very different in years gone by…..
For many mortgage holders, it makes sense to remortgage for an array of different reasons such as cheaper rates, releasing equity, increased property value and even something as basic as an improvement in their overall finances.
This is a market which is extremely competitive, and there are numerous opportunities to negotiate very attractive rates. We also know that more homeowners are using the services of mortgage brokers, allowing them to cast their net a little wider across the lending market.
While there has been historic scepticism regarding the role of mortgage brokers, commissions and other charges are now extremely transparent, and there is more protection for the consumer.
A knowledgeable and well-connected mortgage broker has the potential to pay for themselves many times over.
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best mortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.