There are many reasons why you make the decision to remortgage your house. These can include; swapping to a lower rate product, releasing equity for investment, a one-off purchase, or making improvements to your home. There are also many other reasons why you may choose to do this.
There are a number of factors that need to be taken into account by you, the borrower. They tend to centre around financial factors such as pricing (interest rates), fees (both lenders fees and potential legal fees where applicable).
In addition to the borrower’s consideration, advisers have to consider longer term factors including affordability and suitability of the recommended lender, i.e. maximum age at the end of term, the lenders standard variable rate and also their current treatment of existing clients looking to remain with the chosen lender long-term.
This guide is leaning towards individuals looking to remortgage their home however there will be a number of follow-on guides to cover topics that will help; first time buyers, second home purchases, professional landlords and individuals with complex income structures. Here we’ll be sharing 5 crucial tips to consider when remortgaging. It’s important to note, however, that this content should not be taken as financial advice. It is for information and inspiration purposes only.
#1 Consider the “Why”
There are many reasons why you might want to remortgage, and it’s important to have these in your mind before getting started. For most people, the primary goal as stated above will be a financial factor.
Financial factors are wide ranging and can include both increases and reductions in your earnings, a partner taking time away from work to care for a family member or perhaps you wish to borrow some additional money for the reasons in paragraph one of this article.
#2 Check Credit Score & Equity
Two very important points to consider at the very start are a) do you have enough equity in your property to enable you to remortgage and most importantly b) is the conduct of your credit good. Point b is very important as most lenders will carry out a credit reference check at the initial decision stage. This will leave a footprint on your credit file confirming that a lender has made an enquiry. At this point, your application may be declined due to “poor credit conduct”.
It is essential that you ensure that all credit payments, this can be mortgages, car loans and credit cards are made on a timely basis and in line with the credit providers requirements. Please note that the above are classed traditionally as credit however direct debits are essentially credit from a provider that you pay a month in arrears so mobile phones, gas, electric, water are equally as important.
Late/missed payments can have serious consequences for you in the long term unless you have a very good explanation. In most cases you will be deemed as a higher risk by the respective lenders.
Please note that most lenders use credit agencies such as Equifax, Experian and Call Credit. If you are in any doubt, apply online with any of these agencies to receive an accurate, upto date report of your credit position.
#3 Prepare Your “Deposit”
Remember, “Equity” is similar to having a deposit for a house. So, if you are in strong, positive equity position on your current property and you are thinking about remortgaging, this is a good start. All lenders use a term called Risk Based Pricing. This means the higher the value of your equity/deposit, the lower the rate will be. In most cases, the minimum equity/deposit you will need is 5% of the property’s value. As above, the higher the deposit/equity position, the lower the rates will be. Most lenders best rates are around 50% of the value, i.e. a loan that equates to 50% of the properties overall value.
#4 Scrutinise Your Finances
When it does eventually come to the point of approaching different lenders for remortgage deals, you will need to discuss your finances with them. Given recent, much needed industry changes, most lenders have gone from working with a standard multiple of your individual/joint incomes to a much more in-depth analysis of your monthly income and expenditure. This will involve a “stress test” to ensure that you can afford your monthly payments both within the short, medium and long term should rates rise significantly.
It is always a good idea to periodically check your bank statements to ensure that your finances are being run in an efficient manner. Are there any areas of excessive and or unnecessary spending?
#5 Think About the “Deal Type”
Broadly speaking, there are two types of mortgages available in the marketplace, Fixed or Variable rates. Variable rates open out into a number of additional options such as Discount, Tracker and Standard Variable Rates (SVR).
Broadly speaking, if you want certainty around your monthly payments, something ideal from a budgeting perspective, the fixed rates are probably going to work better for you.
If you are keen to take advantage of potential movements in the Bank of England’s base rate, then this would fall into the category of a Tracker product and if you are again keen to look at a variable product that can move in line with a lenders variable rate (SVR), a Discounted rate may suit.
The key difference between a Tracker and Discounted rate product is that one “Tracks” the Bank of England’s base rate, and the other offers a Discount below a lenders Standard Variable Rate (SVR). The similarity is that neither product provides you with certainty of the fixed monthly payment.
As an adviser, it is my role to help you understand what the implication would be should you chose to go with any of the above arrangements.
I would be delighted to take any enquiries or answer any questions you may have based on this article or the wider picture with regards to your mortgage requirements in 2020 and beyond…
Have a wonderful Christmas and New Year. Best Wishes.
This article was written by Ben Horsfield, Head of Mortgage Services.
