It is no surprise to see that remortgage applications have increased dramatically as UK base rates continue to fall. This is a trend which began a few years ago and has led to many homeowners reducing their monthly payments.
While often seen by some as a simple tick box procedure, applying for a remortgage is to all intents and purposes the same as applying for a new mortgage.
One thing often overlooked, you will need to pass a remortgage affordability test as you would with any normal mortgage!
Remortgage Affordability Test
Many of those intending to remortgage their home will be surprised to learn that they will need to pass an affordability test before any funding can be approved.
In reality, this is a type of stress test which will see whether a homeowner could afford a potential change in interest rates in the future.
When you bear in mind the relatively low level of both base rates and mortgage rates at the moment, a return to anywhere near previous interest rate levels would likely mean a huge increase in monthly mortgage payments for many people.
So, while some may see the remortgage affordability test as nothing but ticking boxes, it not only protects the lender but it also protects the borrower.
Preparing for a Remortgage Affordability Test
On the surface, you may think there is nothing you can do to prepare for a remortgage affordability test – but there is. If for example, a fixed-rate term on your current mortgage was to expire in 12 months, then you can try to fine-tune your finances in the meantime.
Credit reports are readily available on the Internet today, often free of charge, and are a perfect point at which to start.
Checking your credit report will give you not only your current credit score and recent trend but also details of how the score was arrived at. You may notice discrepancies or errors in your credit report, which could impact your ability to secure funding.
You may have had financial issues in the past and recently began the process of rebuilding your credit score. There are numerous relatively simple actions you can take, such as applying for credit, to show you are creditworthy, and perhaps opening a savings account to reflect a more sensible approach to finance.
These will not make a huge difference in your credit rating, but they give the right indicator to potential lenders and are certainly a step in the right direction.
In the event that you do come across errors in your credit file, it is important that these are reported as soon as possible and rectified.
It is bad enough being rejected for a remortgage as a consequence of real difficulties in the past but to be refused as a consequence of errors on your file, that should not happen.
We all know that the Internet now plays a huge role in not only finance but also our everyday lives. The beauty from a financial point of view is that services such as remortgage calculators are available online 24/7.
The fact that you can use them in the privacy of your own home at a time of your choosing means you can take your time to try different scenarios. The traditional remortgage calculator will allow you to vary factors such as mortgage term, interest rate and amount.
Many remortgage calculators will also allow you to input details of your own finances after which they will work out what surplus you have left to pay towards a mortgage.
They can then work backwards and calculate your maximum borrowings to give you an idea of your financial strength. For many people, this is as important, if not more so, than the traditional mortgage monthly payment calculator.
This allows you to compare and contrast different scenarios and indeed work out whether it makes sense to remortgage your property.
Even though there are in excess of 300 lenders in the UK mortgage market, many also offering remortgages, it is only recently we have seen a surge in demand for remortgage brokers.
The reality is that with more than 300 lenders to consider it is near impossible for anyone with a non-financial background to find the best deal.
Indeed, in the past, more so than today, many promotional offers through private banks and niche lenders were invitation only. Therefore, it is not difficult to see the potential advantages of using a remortgage broker.
However, with tied brokers and independent brokers, what is the best option for you?
Independent Remortgage Brokers
As the name suggest, independent remortgage brokers are not restricted in any way as to who they can negotiate with and agree remortgage deals.
Therefore they can scour the market for the best deal for your particular situation and negotiate improved terms where applicable. In reality, they will have strong negotiations with particular lenders because realistically, it is impossible to have a close relationship with more than 300 different parties.
However, the main fact is there are no restrictions on the parties they can communicate with.
One of the more common complaints in years gone by was a lack of transparency in the remortgage broking sector.
The situation has changed dramatically in recent times with tighter regulations ensuring that all relationships and income streams are revealed prior to any agreements.
This has injected a greater degree of confidence in the sector and given customers an enhanced element of protection.
In general, there are three different types of income stream which are:-
- Commission from clients
- Commission from mortgage lenders
- A mix of the two
A growing number of clients now prefer to pay commission direct to remortgage brokers when funding has been approved.
While customers have legal protections, for many, this removes any potential conflicts of interest.
Different Types of Remortgage Lenders
As we touched on above, there are three clearly defined types of remortgage lender, although the introduction of crowdfunding platforms has, to a certain extent added to the mix.
Each lender has very different characteristics and will appeal to those in varying financial scenarios.
Even though private banks and niche lenders have opened up more to the general public in recent years, there can still be a level of secrecy with some funding opportunities on an introductory only basis.
Traditional Remortgage Lenders
In years gone by traditional high street remortgage banks saw this type of transaction as their “bread-and-butter”. With private banks and niche lenders often in the background, the majority of mortgage holders would simply remortgage with their existing lender to save any “hassle”.
This changed dramatically in light of the 2008/9 US mortgage crisis which spread right across the worldwide lending sector. Traditional banks saw their balance sheets impacted, and many withdrew from a variety of different mortgage services.
This void was very quickly filled by private banks and niche lenders, leading to a reduction in the traditional high street bank’s market share of remortgage business.
While it would be wrong to suggest that traditional banks are now uncompetitive in the remortgage market, there is no doubt they have seen their market share and profit margins come under pressure.
In reality, the majority of traditional remortgage lenders tend to focus on “vanilla” funding which is relatively straightforward with no complex financial scenarios.
Private Bank Remortgage Lenders
As we touched on above, in years gone by the private banking sector was strictly invitation only with a tendency to focus on high net worth individuals.
The situation has changed in recent years with private banks now more visible although access to the inner workings and funding negotiations is still by invitation only with many of them.
This prompts the question, what do private bank lenders have to offer?
Private banks are funded in a very different way to their traditional high street counterparts. As a consequence, they are not legally bound by the traditional affordability test and can be more flexible.
This should not be mistaken for a willingness to consider high-risk opportunities but more an ability to look at the broader picture rather than specific narrowly defined finances.
As we touched on above, while traditional remortgage companies tend to focus on “vanilla” transactions, private banks are at the other end of the spectrum, specialising in complex scenarios.
They will entertain “vanilla” funding opportunities, and will often be very competitive, but their main focus does tend to be towards more complex scenarios.
Niche Remortgage Lenders
Such has been the increase in demand for remortgage funding that we have seen the emergence of niche remortgage lenders accommodating an array of different scenarios. Companies operating in this area tend to have a very specific niche which allows them to be ultra-competitive and ultra-informative to their clients.
Due to the volume of business, they are able to channel to their lending partners; they can often negotiate terms at least matching private banks if not bettering them on occasion. It is simply their focus on a particular type of mortgage arrangement which can make them so competitive.
Obviously, the more potential lenders operating in the remortgage market, the more opportunity to play them off against each other to negotiate the best terms possible.
Knowing who to go to, information required and the level of funding available is for many, part of the battle and can save considerable time often wasted approaching random lenders. It will be interesting to see how niche remortgage lenders and the new channel, which is crowdfunding work together in the future.
Many of those attracting large volumes of business has the potential to cause significant disruption to the market, benefitting borrowers.
Reasons to Remortgage
There are numerous reasons why you may look to remortgage a property which include:-
- Equity release
- Secure improved terms
- Fixed-rate period coming to an end
- An increase in property value
- Improvement in your finances
- Debt management
- Home improvements
Within reason, as long as you pass the remortgage affordability test, the vast majority of lenders will have very few restrictions on how the funds can be used.
All of the above reasons to remortgage are perfectly understandable, and each has a particular endgame in mind.
Top Remortgage Lenders
As the majority of private banks and niche lenders tend to accommodate rather complex financial situations, there is no one size fits all regarding terms, LTV and headline interest rates.
As a consequence, when you look for top remortgage lenders in the UK, you will likely come across:-
- Lloyds bank
- Bank of Scotland
To give you an idea of the private banking businesses operating in the U.K. lending market you may come across names such as:-
- HSBC (private banking division)
- St James’s Place
- Standard Chartered
- Barclays (private banking division)
You will notice that a couple of banks are in both of the lists, although they have very separate traditional and private banking operations.
Getting a Whole of Market Quote
When researching the U.K. remortgage sector, you are likely to come across the term “whole of market quote” on a regular basis. As the name suggests, this is a mortgage quote which has been arrived at after scouring the whole market for the best deals.
This is in direct comparison to a tied remortgage broker where, as we covered above; they are restricted to a relatively small number of lenders when seeking funding.
When looking for a whole of market quote, there are many different factors to take into consideration such as:-
As mentioned earlier in this article, it is very important to get your credit rating in order before you even think of applying for a remortgage. For many remortgage companies, this will be their first port of call after taking your basic details and enquiry.
In simple terms, the lower your credit score, the riskier you are considered by lenders.
However, even if you have a relatively low credit rating, this does not mean you will be automatically rejected, but if funding is available, it will likely be on a higher than the average interest rate.
Yes, you will still need to pass an affordability test if you take out a remortgage through one of the U.K.’s many traditional banks.
The situation is a little different when it comes to private banks and niche lenders, but even then, you will have to provide evidence that you can cover monthly repayments.
The majority of remortgage agreements tend to be repayment mortgages, but there may be an opportunity for interest-only deals in certain circumstances.
At this moment in time, the maximum LTV you could expect is around 80%, although the vast majority of people get nowhere near that level. As a consequence, the minimum deposit required when looking at a remortgage will be around 20%.
In simple terms, the greater the deposit, the less borrowings required which equates into a reduced risk for the lender.
The whole premise of the mortgage and remortgage industry is built around the risk/reward ratio.
When using a remortgage broker, they will advise you of lender’s fees in the event they are able to negotiate attractive terms. In some circumstances, due to the level of outstanding mortgage on your property, it may not make financial sense to remortgage at that time.
This is where many remortgage brokers come into their own, offering advice and guidance which can literally save you thousands of pounds.
Spread Your Wings
When looking to remortgage their home, for many people, there is a natural temptation to stick with their existing mortgage company. Simply approach them about a remortgage, go through the paperwork, and everything should be tied up fairly quickly.
However, are you really getting the best deal with your existing mortgage provider? It is important to spread your wings when looking to remortgage and if your current provider is the most competitive, go with them.
When more attractive terms have been quoted, your existing provider may agree to match them to retain your business. Ensure that you use your negotiating position to the maximum!
Getting the Best Remortgage Deal
When talking about the “best mortgage deal” available, this should be considered in a relative fashion. Comparing and contrasting terms and headline interest rates for mortgages with very different criteria is like comparing apples and pears, totally irrelevant.
It is very easy to compare traditional “vanilla” mortgages, but when you delve into more complex financial scenarios and bespoke arrangements, comparisons carry very little weight.
Many people believe that using remortgage brokers has allowed them to obtain the best terms for their remortgage deals. Whether through a traditional bank, private bank or niche lender, it tends to come down to the negotiating skills of the mortgage brokers themselves.
It would be unfair to suggest that traditional high street banks are always uncompetitive, but it is safe to say the environment today is more challenging than it has been at any time in the recent past.
Indeed, in order to protect their market share/profitability, we have seen a number of high street banks acquiring stakes in crowdfunding platforms to effectively “spread their risk”.
It is safe to say that the UK remortgage market is as competitive today as it ever has been. However, the re-emergence of remortgage brokers under new regulations and greater transparency has given many mortgage holders food for thought.
Very often, there is a temptation to look at specific elements of a remortgage in isolation as opposed to looking at the broader picture.
What may seem like a sensible short-term option may have significant financial consequences on a long-term basis.
Some people feel a natural impulse to negotiate a relatively short-term remortgage so that they can “get it paid off”. In a perfect world, yes, we would all like to repay mortgage debt sooner rather than later.
However, in some instances, this may impact your short-term cash flow which could consequently lead to an array of financial problems.
You need to balance the term of your remortgage against your short, medium and long-term financial outlook.
Type of Remortgage
While there are two basic types of remortgage, interest only and repayment mortgages, they tend to come in a variety of different formats.
We have capped interest remortgages, interest remortgage collars, overpayment arrangements, offset remortgages and discounted rates.
This is just a relatively small selection of the different types of remortgage available, but it gives you an idea of some of the options.
New regulations brought in by the FCA have restricted high street lenders to a maximum 4.5 times annual income or 4.5 times joint income for a joint remortgage. This is the higher end of the remortgage echelons, and in reality, the majority of people will deal on reduced multiples.
There is greater flexibility when it comes to private banks and niche lenders, but no lender would ever be reckless when dealing with more risky clients.
If the risk/reward ratio does not stack up, then it is unlikely you will be able to secure remortgage funding.
Many people automatically assume that the LTV ratio on which their initial mortgage was based on will simply be repeated with a remortgage.
When you take a step back and consider this scenario, a variety of things may have changed, you may have less income coming in, you may not require a full remortgage, or you may even have experienced financial difficulties which have blotted your credit rating copybook.
There are many different factors which will impact the LTV ratio on your remortgage, which is why it is advisable to seek the services of a remortgage broker.
As we have mentioned on numerous occasions, the UK has one of the most competitive remortgage lending markets in the world. In reality, you will only find the best terms for your particular scenario if you know what you are looking for.
For example, are you looking for a fixed-term remortgage, interest-only, repayment, capped, variable or discounted? When you consider these are just a selection of the many options available, it can become very complicated.
While you need to keep one eye on your long-term financial liabilities, there is nothing wrong in reducing them in the short-term with a fixed-rate period.
Comparing Remortgage Lenders
The basic elements of any remortgage funding arrangement include:-
- Headline interest rate
It is dangerous to focus on one particular element of a remortgage funding arrangement in isolation.
A relatively low headline interest rate may seem attractive, but if the mortgage term is extended, then you may pay more interest in total. Many borrowers might want to make additional ad hoc repayments in the future and therefore demand a degree of flexibility with their funding arrangement.
It is very important to take financial advice before signing up to any remortgage arrangement – just to ensure you are signing a deal which is in your short, medium and long-term interests.
Thankfully, there is as much competition in the UK remortgage market as there is in the traditional mortgage market. This ensures that the vast majority of lenders are “on their toes” and constantly battling with competitors to attract a new customer.
This is a win-win for borrowers as not only are headline terms more attractive than they were in years gone by, but there may still be further room for negotiation.
Over the last decade, we have seen private banks and niche lenders emerging from the shadows with the new kids on the block, in the shape of crowdfunding platforms, also nibbling away at market share.
Those looking to remortgage a property tend to want the agreement completed “yesterday” even though it can be dangerous to rush in.
Take advice, take your time, prepare your finances and in tandem with your remortgage broker, ensure that you approach those who are more suited to your specific circumstances.
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.