Since the 2008/9 US mortgage crisis, which resulted in one of the worst worldwide economic downturns in living history, interest rates have been near historic lows. This has prompted more people to look towards remortgaging their home for a variety of reasons.
Thankfully, with more than 300 lenders operating in the UK market, there are traditional banks, private banks, niche lenders and more recently crowdfunding platforms offering an array of ways in which to remortgage the property.
In this article, we will look at the opportunities and the likelihood of being able to remortgage in a variety of different financial scenarios. What you need to do, the potential consequences and how you can minimise interest rates going forward.
However, before we look at mortgage applications in more detail, it is worth reminding ourselves of the main reasons to remortgage and, just as importantly, not to remortgage.
Reasons to Remortgage
Here is a list of bullet point reasons why you may wish to remortgage your property:-
- The fixed-rate deal is about to end
- Better rates available
- Your home has increased in value
- Inflexible mortgage arrangement, no opportunity to overpay
- Switch from interest-only to a repayment mortgage
- Raise capital for alternative use
- Switch to flexible mortgage facility
This list will give you an idea some of the more common reasons why homeowners look to remortgage their property.
However, for those looking to remortgage, it is essential to take financial advice to ensure you are taking the most appropriate route.
Reasons Not to Remortgage
It is not very often that you see a list of reasons not to remortgage, but this list is as helpful as the one above:-
- The remaining mortgage is relatively small
- Large repayment penalties
- Deteriorating financial scenario
- Property value has fallen
- Minuscule equity in the property
- Credit problem since the last mortgage
- Your current rate is very competitive
Many people fail to realise that there are still significant costs associated with a remortgaging arrangement. The idea that you simply roll over the initial mortgage is sadly misplaced, and you must be aware of all associated costs before committing yourself.
In the event that you have a relatively small mortgage remaining, it may not make sense to remortgage when taking into account the cost.
Remortgaging Under Various Scenarios
As we touched on above, the UK remortgage market is extremely liquid and extremely active. You can probably find a lender willing to discuss terms for any type of financial scenario.
Obviously, everything boils down to the basic risk/reward ratio in that the greater the risk, the higher the interest rate. So, when looking to remortgage, the key is to put yourself in as strong a position as possible in the eyes of a lender.
Therefore, the first thing to do before even looking at remortgage rates is to review your credit history.
Request a Credit Report
Unfortunately, the vast majority of those looking to raise finance in the UK automatically assume that their credit report will be correct.
While in the majority of cases, this will be true, there will be circumstances where there have been mistakes which could impact your credit rating and ultimately your abilities to secure a mortgage.
So, before even looking at remortgage rates, it is essential that you obtain a copy of your credit report and go through this with a fine-tooth comb.
There are also ways and means in which you can “improve” your credit scores such as opening a savings account, requesting credit (not necessarily using it) and other housekeeping activities.
These may not have a huge impact on your credit rating, but they might push your rating to a level which makes it more possible to secure remortgage finance.
Getting a Remortgage With Bad Debt
The first thing to remember is that borrowers with bad debts are considered to be higher risk than average. As a consequence, you should expect to be charged a higher interest rate in the event that you were able to secure remortgage finance.
That said, assuming you have a degree of equity in your property, and regular income, a remortgage could make a huge difference in the long-term reorganisation of your finances.
Paying Off High-Interest Debt
If you have bad debts, there is every chance you could have credit card debt, an overdraft and even a personal loan. Traditionally these types of debts attract relatively high interest even for those with a secure financial position.
Even if you are charged a premium remortgage interest rate, there’s a good chance it will be significantly less than the rates on your outstanding debt.
Therefore, it may well be possible to extract equity from your property via a remortgage and use this to pay off high-interest debt.
Avoiding Legal Action
Unfortunately, more and more people are struggling with excess debt, even though many will have equity in their property. If this is the case, and you can see no other means of repaying those debts than remortgaging your property, it is certainly worth considering.
Once legal action is taken against outstanding debts, then effectively asset sales can be taken out of your control. Property fire sales often raise below-market valuation proceeds which could at best erode your equity.
Therefore, if you foresee financial problems and you have equity in your property, it is certainly worth considering a remortgage.
Getting a Remortgage With an IVA
An IVA (Individual Voluntary Arrangement) is a formal arrangement to repay creditors as much of your outstanding debts as possible before the balance is written. Your debts will be frozen when the IVA is approved with no further interest or additional charges – on the debts within the IVA.
At first glance, you might be forgiven for assuming that remortgaging while running an active IVA is a non-starter. The fact that an insolvency practitioner effectively has control of your assets during an IVA means you would need approval before seeking a remortgage (or any credit over £500).
While a traditional IVA lasts around five years, this can be extended if, for example, you have significant equity in your property and are negotiating a remortgage. This would need to be done in conjunction with your insolvency practitioner, but there are numerous benefits.
First of all, in the event that you are able to release significant equity, this may be enough to satisfy all of your creditors. Any additional surplus capital would be returned to you, and your IVA would be brought to a close.
In the event there was only sufficient equity to pay-off part of your creditors then this would still be considered, if worthwhile. There is a general cut-off point of around 15% equity under which it is not viable, but there are sometimes exceptions to the rule (depending on the value of the property).
So, the simple answer is that even with an IVA, it is possible to arrange a remortgage on your property. However, with a challenging credit history (in the midst of an IVA), you would probably need to approach a specialist lender.
You would also need to undertake an affordability test as with any mortgage/remortgage application.
Getting a Remortgage With a CCJ
It is safe to assume that any CCJ on your credit history will alert lenders about possible increased risk. Therefore, in reality, it may be challenging to organise a remortgage but not necessarily impossible.
There are a number of factors to consider with regards CCJs which include:-
Size of the Debt
If the CCJ involves a relatively modest debt, then it may well be possible to negotiate with a lender and explain what happened in more detail.
Do not be under any illusions that the existence of a CCJ on your credit history is anything but negative, but it is not necessarily the end of the world.
We have seen numerous situations where individuals have received a CCJ as a consequence of circumstances out of their control. In this scenario, there is every chance that you could still negotiate a remortgage, but unfortunately, the stigma of the CCJ would always be there.
As a consequence, it would likely impact the interest rate charged on any remortgage.
If you are seen as a “riskier” prospect in the eyes of a lender, then they may reduce the LTV ratio on any remortgage agreement. This is effectively the ratio of funds raised against the value of your property and currently stands at a maximum of 80%.
So, if you had a CCJ on your record, then a lender may reduce this to 60% which gives them greater headroom between the debt and the value of your property – a type of insurance policy.
Ultimately, you will also need to pass an affordability test when approaching traditional remortgage lenders. The situation is a little more flexible when it comes to private banks and niche lenders, but it is a common misconception that these types of lenders are more open to increased risk.
If your financial situation has changed since your initial mortgage, then you may struggle to pass the affordability test. In a best-case scenario, you may be offered a relatively modest LTV, and in a worst-case scenario, your application could be rejected.
Getting a Remortgage When Self-Employed
The UK is a hotbed of entrepreneurs and self-employed individuals. It will, therefore, be no surprise to learn that there are niche lenders who focus on the self-employed looking for mortgages and remortgages.
There are also traditional lenders such as high street banks, but very often, niche lenders can offer better terms. This is because of the array of challenges self-employed homeowners can face when looking to remortgage.
Challenges such as:-
As a self-employed individual, when applying for a remortgage, you will need to provide financial records going back between two and three years.
These need to be produced in a fashion which is acceptable to a lender and may require the involvement of an accountant. If you are new to the self-employment sector and not able to provide historical records, you may not be able to obtain remortgage finance.
As a self-employed individual, there may be times when business issues impact your credit record, which will ultimately impact your ability to borrow money.
It is therefore vital that you monitor your credit records on a regular basis to ensure they are correct and make improvements where possible. Good credit history is always taken as an indicator by lenders that you are credible.
The subject of future income is very important but can sometimes be challenging for the self-employed. Not all self-employed people have formal long-term contracts with their clients even though they may have been working with them for many years.
So, while some lenders will be a little flexible on this particular subject, they will need to see some kind of evidence.
Then there is the ultimate quandary for the self-employed, tax returns. One form of income evidence is your tax returns with many people looking to reduce their tax liability by reducing their net income.
This may be perfectly legitimate such as offsetting various costs, but when you consider that mortgages/remortgages are carried out on a maximum 4.5 times annual income, there lies the quandary.
It may be possible to increase net income, but that poses the question of reduced net income reported to the tax authorities. Do you see the problem?
Getting a Remortgage With Large Debts
Just because you have “large debts” will not necessarily impact your ability to remortgage your property. For example, someone with an income of £100,000 a year may have debts of £30,000, which are relatively high by number but small in comparison to their income.
Alternatively, someone with an income of £20,000 a year may have debts of £15,000 a year which they may struggle to pay off. So, when looking at large debts and remortgages, it is all relative.
As we touched on above, there is a general misconception that affordability tests are not applicable when remortgaging a property. The truth is they are.
So, whether your debts are large in amount or large in comparison to your income, if after taking everything into account you would not be able to cover your remortgage payments you would likely be rejected.
Remortgaging your property and releasing equity can be very useful when looking to reorganise your finances and pay off debts. The chances are that remortgage interest rates would be significantly less than those on your outstanding debts.
However, you would need to bear in mind the term of a remortgage as you may be paying less interest on a monthly basis, but for a prolonged period of time.
Getting a Remortgage While on Benefits
Many people fall into the trap of assuming that homeowners on benefits will be somehow excluded from all mortgage/remortgage opportunities. It is fair to say it can be a challenge, but wrong to suggest there is no possibility of remortgaging while on benefits.
There are numerous issues to consider which include:-
You will still need to pass an affordability test when applying for remortgage finance. Just because you are on benefits does not necessarily mean you won’t have sufficient funding.
You may have additional sources such as a pension, redundancy payment, or you may have the opportunity to return to employment in the future.
As long as you pass the affordability test, there is every chance you will be able to raise a degree of finance.
Level of Equity
A remortgage company will also consider the level of equity you have in your property when looking to remortgage. It may be possible to replace any outstanding high-interest debts with relatively low-level mortgage debt which could actually enhance your financial position. A remortgage could change your financial outlook going forward.
There is no point in suggesting it would be easy to remortgage while on benefits but there are also specialist lenders out there who may accommodate this particular scenario.
For many people, this is where the use of mortgage brokers is very important.
Freelancers Applying for a Remortgage
Freelancers applying for a remortgage will often find themselves in a similar situation to the self-employed.
Indeed, in many ways a freelancer falls between the two stools of employed and self-employed which can make funding negotiations interesting, to say the least!
There are various factors to take into consideration which include:-
Proof of Income
Lenders will require at least three years accounts to show proof of income although some specialist lenders may just require two years of accounts.
The accounts will need to be prepared under-recognised accounting regulations and show the level of income declared to HMRC.
Some lenders will limit income ratios, annualise daily freelance rates and consider dividends where a freelancer works under a company umbrella.
This can be a very complex area of the lending market.
There will be situations where freelancers are employed on a long-term basis although the majority tend to work on short-term contracts which are often rolled over. Therefore, it can be difficult to present evidence of secure sustainable income going forward.
There are specialist advisers that cater to freelancers looking for remortgage funding, helping to put together the specific information required by lenders.
As we touched on above, freelancers looking to remortgage their home may also encounter the same declared income quandary as self-employed individuals.
Legally reducing net income to reduce tax liabilities will impact income multiples when looking at maximum remortgage funding. There may be an opportunity to do some prep work in a year or so before applying for a remortgage?
Getting a Remortgage With No Regular Income
On face value, it is difficult to understand how you could secure a remortgage with no regular income. With no regular income, there is no way of passing the affordability test, and therefore access to traditional mortgage lenders would be curtailed.
However, the key is in the term “no regular income” which suggests there is an income of a kind but not on a regular basis.
There are various different types of irregular income which include:-
- Investment dividends
- Compensation payments
- Asset sales
When applying for a remortgage with no regular income, you would likely be looking towards a private bank or a niche lender. Very few traditional lenders will accommodate such a scenario for the simple fact that you would fail the affordability test.
However, private banks and niche lenders are more flexible, often more accommodating, and if additional assets could be used as collateral, this would strengthen your case.
There are numerous high net worth individuals that are asset rich but cash poor who would also fail the affordability test – despite the fact they are extremely wealthy.
So, a remortgage without any regular income may well be possible.
Getting a Remortgage Aged Over 60
Unfortunately, many mortgage lenders are reluctant to offer mortgages for those in later life. This, despite the fact many people are regularly in full-time/part-time employment well into their 60s and beyond.
In many ways, the mortgage industry has failed to move with the times with regards to age discrimination, although there have been some developments in recent years.
Some of the options available today include:-
Limited Equity Release
While not necessarily traditional high street mortgage lenders, private banks and niche lenders may well accommodate reduced LTV ratios when considering remortgages for those aged over 60.
This creates an extended buffer between debt and the value of the property and enhances their quasi-insurance policy.
This is the most common form of equity release for older homeowners looking to raise capital. There are no repayments to be made as interest is rolled up and repaid together with the initial capital when the owner moves into care or dies.
Lifetime mortgages are more heavily regulated today than they were in years gone by, offering greater protection for homeowners.
As ownership of the property does not change hands, homeowners are still able to live in their own home rent-free.
Home Reversion Plan
Home reversion plans have attracted a fair share of controversy in years gone by. In effect, the lender will acquire a share of the homeowner’s property, but this will be at a sub-market valuation.
In some cases, this could be as low as 20% of the market value but more likely to be around the 50% level. One of the main additional benefits is continued rent-free accommodation for the rest of the homeowner’s life.
If you take a look at remortgage activity in the UK, it is very much focused on UK base rates which tend to dictate the direction of mortgage rates. As UK base rates currently stand at 0.1%, it is no surprise to learn that there has been significant interest in remortgages – especially those of the fixed-rate variety.
This offers many homeowners the chance to reduce their monthly payments as well as releasing equity at the same time.
Due to the growing complexities of the marketplace, including specialist and non-specialist lenders, greater emphasis has been placed on mortgage brokers when looking for the best deal.
Whatever route you take with regards to remortgaging, it is important to take professional financial advice.
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.