Our Guide to the Purpose of a Remortgage & How It Can Help You

The Mortgage bank guide to the purpose of a remortgage
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There are numerous reasons why you may look to remortgage your property but rest assured your mortgage company will likely ask why!

As a lender, they will be keen to confirm that the funds raised will not be used for a risky venture which may impact your ability to pay.

In the event that, for example, you are looking to raise funds for a new business venture, a traditional mortgage lender may turn you down. That said; numerous specialist lenders in the market may be willing to discuss a remortgage for what a traditional lender might deem a “risky venture”.

This example perfectly illustrates why you need to research the best remortgage rates for your situation.

Remortgage Statistics

The following table will give you an idea of the remortgage market as a percentage of gross advances in the UK.

DateHome MoversRemortgagesBuy-to-letFirst-time buyersOther
2018 Q330.1%30.3%12.1%21.0%6.5%
2018 Q429.7%31.0%12.5%21.3%5.5%
2019 Q126.9%33.3%14.0%19.2%6.6%
2019 Q229.2%29.5%13.2%21.3%6.8%
2018 Q331.3%28.0%12.3%21.9%6.5%
2019 Q430.7%30.7%12.4%21.5%6.2%
Source: Financial Conduct Authority Mortgage Lending Statistics

We will now take a look at some of the more common reasons for remortgaging and the various issues you need to take into consideration.

Remortgage to Renovate

The mortgage bank Remortgage to renovate

While it would depend upon the type of renovation and the cost, the vast majority of those looking to remortgage to renovate should be able to do so via the traditional mortgage route.

There are situations where more in-depth renovations may require specialist lending such as a renovation mortgage, refurbishment loan or some type of bridging finance.

For the moment we will focus on remortgaging to renovate and the various issues to look at.

Impact on Property Value

When looking to raise funds to renovate your property, you should also have one eye on the potential improvement in the value of your home.

Under normal circumstances, you need to balance the cost of the renovations against the potential uplift and see if it is really worthwhile.

Project Management

If you are undertaking a major renovation of your property, it may take time and may need to be micromanaged.

While you would normally have carried out a cost analysis before applying for additional finance, you may need to look at inserting buffer zones.

For example, what if there is a delay in starting the work, an increase in costs or some unexpected structural issues when the work begins?

Planning Permission

While not necessarily a problem for everybody looking to renovate their property, there may be some properties which require planning permission or have potential restrictions.

It is very important that you carry out the necessary groundwork before you even consider raising funds.

Remortgage to Build an Extension

The Mortgage Bank Remortgage to build an extension

It is interesting to note that homeowners will consider an extension under almost any economic scenario. For the vast majority, the building of an extension is a long-term investment in something which is required at the time.

This may be a project which has been in the pipeline for many years, and a change in financial circumstances has prompted the move.

However, there are various issues to consider before proceeding:-

Planning Permission

While planning permission for renovations may depend on the status of the building, planning permission for an extension is a more common requirement. You will likely need planning permission from your local authority which can be costly and take some time.

However, some of the potential risks of rejection can be removed if you are looking at an extension similar to others in your street or area.

If this is the case, it is unlikely that the authorities would reject similar applications after authorising others.

Property Value

The cost of building an extension is typically much higher than the cost of renovations, and therefore more consideration should be given towards a potential uplift in the value of your home.

Under normal circumstances, you’d expect a significant improvement immediately, but this would depend upon the type of extension and perceived value by third parties.

We have seen some property extensions having such an impact on the value of a property that it may be possible to remortgage again, on a much higher value, further down the line.

Investment Risk

Even though there are many horror stories out there regarding builders who have failed to deliver on their promises, leaving homeowners high and dry, there are ways and means of mitigating the risk.

It is advisable to obtain a number of quotes, check out the reputation of any builders you are considering and also insist on stage payments. Stage payments incentivise builders to complete the work on time and to a high standard.

It also mitigates some of the risks if a builder was to, for example, go out of business.

Remortgage to Pay Off Debt

The mortgage bank Remortgage to pay off debt

It is highly unlikely that standard variable mortgage rates will be the same let alone higher than the interest rate on personal loans.

The same can be said of credit card debt, store card debt, overdrafts and other traditional forms of finance. So, in theory, it makes perfect sense to remortgage a property where possible, on significantly lower rates, and use this to pay off higher-interest debt.

That said, there are still some issues to look at before finalising any refinancing arrangements:-

Affordability Calculation

We have seen occasions where homeowners have got themselves into serious debt with credit cards, etc. In some situations, the individual may already have missed some repayments and are struggling to raise funds elsewhere.

If there has been a change in their income or their credit rating has been impacted, they may fail the affordability calculation for a remortgage.

In this situation, even if they were to secure mortgage finance going forward, the headline interest rate may be greater as a consequence of their financial difficulties.

Mortgage Term

There is no doubt that it makes perfect sense to use low-interest debt to pay off high-interest finance. That said it is worth taking into account the term of a remortgage which could, in theory, be up to 25 years.

So, while the headline interest rate will be significantly lower, you may end up paying more in interest because of the extended term.

In some cases, it may be sensible to look at a reduced term mortgage, although if your finances have turned downwards, this might not be an option.

Close the Troubled Accounts!

Unfortunately, while many people may take the perfectly rational decision to remortgage and swap their high-interest debt for low-interest mortgage finance, some of them fail to close down their high-interest finance accounts!

If you have got yourself into credit card debt, and need to be bailed out by remortgaging, surely it makes sense to close your credit card accounts, etc.?

Remortgage to Buy a Car

The mortgage bank Remortgage to buy a car

While we often see people remortgaging their property to pay off car debt, remortgaging property to fund a car purchase is not as common.

When looking at raising funds to buy a vehicle, there are a number of things to take into consideration before signing on that dotted line.

Cost of Vehicle

If you’re looking to acquire a relatively low-cost vehicle, then, after taking into account mortgage repayment and remortgaging costs, it may be sensible to look at a different type of finance.

This may include a personal loan, dealership loan or even some form of the hire purchase arrangement.

You would need to weigh up the pros and cons of each option, but for relatively low-cost vehicles, a remortgage may not be the best path.

Depreciation

It is common knowledge that a brand-new vehicle will depreciate as soon as you leave the showroom.

Indeed there is evidence to suggest that in the first year the value could depreciate by between 15% and 35%, extending to 50% within three years.

It is therefore, worthwhile considering the type of vehicle you are looking to acquire and how well it may hold its value.

Cost of Finance

While traditionally the interest rate on car finance tends to be significantly higher than a traditional mortgage rate, this is not always the case.

If you have a chequered credit history, then the difference between your remortgage rate and car finance rate may be less than normal.

There may also be situations where car dealerships are offering “unbelievable finance offers” on new vehicles. It is also important to take into account any additional costs when raising any form of finance.

Remortgage to Pay Off Car Debt

The mortgage bank Remortgage to pay off car debt

If you are considering using remortgage finance to payoff existing car debt, we can safely assume you have already compared and contrasted the headline interest rates.

Under normal circumstances, there is the potential to make significant savings on interest payments.

That said, it is still worth checking out details such as:-

Long-Term Interest Payments

As we touched on above, you may actually end up paying more in actual interest if you have a mortgage term which is greater than the car debt you are paying off.

The headline rates may point towards remortgaging finance, but you should also consider the term of each loan.

Cost Efficiency

One of the first things to consider when looking to raise finance to pay off high-interest card debt is the amount of capital remaining and interest element.

It may be that within just a few months; the original car debt would be repaid, which when considering remortgage costs might make it less cost-efficient.

Under normal circumstances, where remortgaging at lower rates is an option, there may well be potentially huge interest payment savings.

However, make sure that you check the level of charges on all options.

Remortgage to Right-to-Buy

The mortgage bank Right to buy

While many councils in the UK have closed their right to buy schemes, which were introduced as far back as the 1980s under Margaret Thatcher, there are still some live schemes.

It may be possible that a family member has the option to acquire their rented home but does not have sufficient finance.

If you were able to raise finance from a remortgage to finance the purchase, it might turn out to be very lucrative.

Discount

The whole concept of right-to-buy schemes revolves around a discount for long-term tenants looking to climb onto the property ladder.

While even a relatively modest discount of say 10% on the market value is still attractive, it is advisable to clarify the discount before looking to remortgage.

Property Valuation

It can be very easy to get carried away with the potentially large discounts on offer, but you need to arrange an independent property valuation.

While valuations should not vary too widely between different parties, it is advisable to be cautious.

Restrictions

When you consider that you are potentially buying a property at well below market value, you will not be surprised to learn that they often come with restrictions.

You may not be allowed to sell the property for a period of time, you may need to give the council first option to buy it back, or there could be other conditions attached to a purchase.

Some of these restrictions may impact your ability to raise mortgage finance.

Protecting Your Investment

Whether you are actually acquiring the property on behalf of somebody else or simply providing the finance, you need to ensure there are legal arrangements in place.

Where there is confusion over ultimate ownership and any related debt, this could impact, for example, inheritance tax planning going forward.

It is probably sensible to take financial advice just to be on the safe side.

Remortgage to Buy a Second Property

The mortgage bank Remortgage to buy a second home

In theory, there is nothing wrong with remortgaging your existing property to buy a second property.

However, in reality, many people might remortgage their existing property to cover the deposit on a second property and then arrange a mortgage on that second property.

As things stand at the moment, you may need to find a deposit of up to 25% or if you can secure additional capital that would mean a smaller mortgage on the new property.

Affordability Calculations

Whether you decide to remortgage your existing property in full to pay for a second property or just raise funds for the deposit, you will still need to go through the affordability calculations.

Therefore, if your financial situation has changed over the years, this can prove challenging.

Security

If you buy a second home, the majority of mortgage providers would prefer that it is inhabited on a full-time basis for added security.

This may include a family friend or family member living in the property in-between visits by the owner. This also makes perfect sense from the owner’s point of view.

Overseas Properties

The likes of Spain, Portugal and other European hotspots have long been magnets for UK investors looking for a second/holiday home.

If you are looking for a second home overseas, there are numerous issues to take into consideration such as local regulations, property valuations, legal documentation and potential currency risk.

These are issues that your mortgage provider should discuss with you at the earliest opportunity.

Remortgage for an Investment Opportunity

The mortgage bank Remortgage for an investment opportunity

Over the years, you will likely come across a number of different investment opportunities such as a buy to let property, corporate investment, shares in a business and commercial property to name but a few.

While each case will be very different, there are certain aspects to consider when raising funds for investment opportunities:-

Risk Factor

While a remortgage company is not in a position to tell you how to spend your money, they can refuse to lend you money.

Alternatively, where they see a particular risk, they may look to charge you a higher interest rate to balance the risk/reward ratio.

However, presenting a structured business plan which has been well thought out can help with your application.

Exit Routes

While not always applicable, if you are looking to raise funds by remortgaging your property, it may be sensible to highlight an exit route from any investment going forward.

Many investors find it easy to invest funds, but sometimes they forget about the potential exit routes.

For example, let’s say an asset in which you invested had doubled in value, but you could not get your hands on the funds as and when required, what is the real value?

Balancing Returns

There is always a cost when looking to remortgage a property although traditionally mortgage interest rates are but a fraction of personal loans and other types of finance.

However, it is very important to assess the cost of finance and loan term against the potential returns from an investment going forward.

At this point, it is also worth taking into account the risk/reward ratio to ensure that you are not taking undue risk for a limited reward.

Mortgage-Related Changes

The Mortgage bank Mortgage-related changes

As we come to the end of this article, it is worth recapping that there are numerous practical reasons why you might look to remortgage a property including:-

Concern That Interest Rates Are Going Up

Even though a mortgage agreement should be viewed as part of a long-term investment strategy, there is nothing wrong in monitoring interest rates to see where you can lock in savings.

For example, as we saw in the aftermath of the 2008 US mortgage crisis, worldwide interest rates fell to record lows. More than a decade later and there is further downward pressure on interest rates but will they move any lower?

This has prompted many people to consider remortgaging their property, looking at fixed-rates for between two and five years – thereby insulating themselves from potential interest rate rises in the short to medium-term.

Nobody can say with any real confidence which direction interest rates will move in the short, medium and long-term, and the only definite rate is the rate before us today.

A Current Deal About to Expire

As the average mortgage agreement is between 20 and 25 years, and the average fixed interest period between two years and five years, it is not inconceivable that a property owner could remortgage numerous times during their lifetime.

Therefore, if a fixed-rate period for your mortgage is coming to a close, it may be sensible to remortgage before reverting back to your lender’s standard variable rate (higher rate).

This will obviously depend upon mortgage rates at the time, but many people will look to remortgage as their fixed-rate period comes to an end.

Limitations Regarding Overpaying

While we have seen some huge changes in the UK mortgage market in recent years, some mortgages will still restrict the potential to overpay.

This means that if for example, your financial situation was to improve dramatically, or you were to receive a financial windfall, you may not be able to pay down your mortgage any quicker.

Even though you would obviously need to consider the pros and cons of switching, costs being a central focus, there may be scope to introduce flexible overpaying options with a new mortgage.

Improvement in Circumstances

When you apply for a mortgage, the rate you are offered reflects your financial circumstances at the time, and won’t necessarily take into account any potential improvements going forward.

Those with relatively strong finances may be able to negotiate a discount on the standard rate. In contrast, others who have experienced financial difficulties may be forced to accept a higher mortgage rate.

Therefore, if you see a significant improvement in your finances, it may make perfect sense to remortgage and thereby take advantage of your renewed financial strength.

Increase in Property Value

Interestingly, there may be potential to remortgage your property if you have seen a significant increase in the value over time.

Some mortgage lenders will specialise in particular price brackets and may be able to offer attractive deals compared to lower value properties.

You will often find that relatively small mortgages can attract higher interest charges simply to provide an acceptable return for the lender.

Reduction in the Mortgage Term

It is only natural when taking out your first mortgage that you are cautious with regards to the mortgage term. Yes, there may be a temptation to go for a relatively short mortgage, but many people prefer the more traditional 20 years up to 25-year term.

If your financial situation was to improve going forward, there may be an opportunity to reduce the term, although this would lead to increased monthly payments.

However, in the longer term, as you are paying down the mortgage capital over a shorter period of time, you would pay less actual interest.

Summary

There are numerous practical and technical reasons why people look to remortgage their properties. This may include anything from new investment to the end of a fixed-term period, an improvement in finances to raising funds for an extension.

Whatever the reason for remortgaging your property, you will always need to pass the affordability test. While the remortgage process can be much quicker than that for a first-time mortgage, it can still take some time to negotiate and complete. 

Therefore, if you require funds in the short-term, it would be better to plan ahead rather than leaving your application to the last minute.

Whether or not you decide to use a mortgage broker is a personal decision, but often they will be able to negotiate better rates than “normal” due to their contacts in the marketplace.

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 remortgage 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.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting The Mortgage Bank.
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