When, how and if to remortgage?

Richard Campo, founder and managing director of  mortgage and protection advisors Rose Capital Partners, shares his advice on how to approach remortgaging your property. 

It was interesting to see that UK Finance released figures on 26^th November stated that remortgage loan approvals were up nearly 13% in October this year compared to October 2018. That is also an increase from last month’s figures (September year on year was 10.6% up). That is a whooping 37,769 new loans approved for people in November 2019 alone and on a clear upward trajectory.

So if you find yourself coming around to remortgage time, or are considering the impacts of borrowing more, or maybe considering moving in the near future and what impact that may have, this is the blog for you.

When should I be looking to organise my remortgage?

We advise that people start to look at this process six months out from their current deal expiring. You may ask “why on earth would you start so soon?”. There are a few practical and timely reasons for this:

• Lenders mortgage offers are normally valid for six months, so you can lock down a rate well ahead of time, let the legal work take its course and forget about it to move onto the next thing you need to deal with.
• By locking in a product at the outset, you will be protected if rates move up as you will have already secured your product.
• There is no getting away from it, house prices have dipped in London and the home counties over the last few years. The earlier you remortgage, arguably, the higher the valuation you can secure. That may be the difference between getting a lower rate on your next product (as if your loan goes from 75% of the property value to 76%, that may well impact the rate as the lower the percentage of the property you borrow, the better the rate you get).
• The legal process can take MONTHS… If you leave it late, you could then run over your product end date and onto the lender’s variable rate, which are normally around 5%. Don’t run that risk as it is such a huge waste of money.

Top tip on this – check the product end date on the mortgage offer. This can vary quite a bit from when you completed your last mortgage. Only two high street lenders (Nationwide and Metro) work on the anniversary of the completion date, all other lenders have set product end dates that may not correlate to when you took out your last deal.

What if my situation has changed?

It is quite common for people to change jobs, their income, or even move from employed to self-employed. None of that is a major drama, as if you want to switch lenders as they will go through their usual affordability and credit checks. However, these are the key factors to think about:

• Product transfers– on the proviso that you have made all your mortgage payments on time, your existing lender will offer you a rate to stay. Lenders do not have to do the affordability checks for existing clients that they do for new ones. In the extreme of you recently going self-employed, having serious credit issues, or increased your outgoings, this is often a safe option you can take advantage of.
  • It’s worth noting that brokers often get better deals even if you are sticking with your current lender, so always double check before committing. That is aside from the benefit of getting advice on what product is in your interests, not that of the lenders.
• Change in employment status– simply changing jobs is rarely an issue if your income has stayed around the same or increased. Most lenders will work on any permanent contract and can be quite open minded, even towards a probation period. If you have changed from being employed to self-employed, that can be tricky and no lender accepts you being self-employed for less than 12 months (the exception being if you have gone to work on short term contracts, in which case, most lenders are quite happy to support you). Anything more than 12 months on is just down to a new lenders criteria. You can then assess if the new deal is better than what you have been offered with a new lender vs your current provider
  • As above, only brokers have unrestricted access to the market which will give you the most informed decision.
• Credit issues– if you have missed payments, or had more serious issues such as defaults, CCJs or mortgage arrears, that doesn’t mean you can’t refinance. Depending on the situation, you may be able to do a product transfer as per the above, or we may find a new lenders that would be cheaper than reverting to the Standard Variable Rate of your current lender. Banks can be surprisingly relaxed in this area. So for arguments sake, if a lender is offering you a 3.5% two year fixed, while comparatively expensive (which you should also take with a bucket of salt, as when I started in mortgages the Base Rate was 5.5%: a ‘great’ mortgage rate started with 6%!), that would be far better than being stuck on a rate of circa 5% for a year or two.

Can I borrow extra money?

In short, most lenders allow you to borrow more money for ‘any legal purpose’. So before loading up on cash and heading to Vegas, please do bear that in mind. Some lenders are stricter than others, so below are the key things to consider for specific capital raising purposes. Its worth noting that one of our core principles is aiming to get all of our clients debt free as soon as possible.

It is frighteningly easy to borrow against your home, and we advise against that unless necessary. It can make sense in certain instances, but we wouldn’t advocate raising money to buy a new Disco (that’s a Range Rover Discovery for clarity, not the mobile disco set up of the 80s we know and love):

• Home improvements– the most common reason for borrowing extra funds. This can make a lot of sense as if done correctly, as it can raise the property value which lenders like. It’s worth noting that most lenders are relaxed unless you veer into ‘structural work’ on the property. So, for example, doing a loft conversion – generally fine. Digging out a basement, not so much. That isn’t to say you can’t do it, but you may need your lender’s approval or move to a lender that is happy with the level of work. Again, this is where independent advice can be extremely valuable as we can even manage agreements with your existing lender if required and organise any top up borrowing.
• Debt consolidation– this is a double-edged sword and should be approached with caution. At a higher level there are circumstances where this can be a good thing, as you can reduce your outgoings and interest rate charged on debt substantially. However, this erodes your equity and you may pay more interest over the longer term. Crudely, 2% charged on £10,000 over 30 years will cost more than paying off the same £10,000 as a credit card debt at 18% over 24 months (£6,000 for the former, £3,600 for the latter if you are interested). This reminds me of my old rugby coach’s favourite phrase when it came to training: “short term pain for long term gain”. This is a very complex area and deserves a blog post all of its own, but in short lenders do have many complex rules and we have our own principles to balance off, so as ever, please do get professional advice so you can get the right outcome for you personally.

What if I want to move?

This is possibly the most commonly asked question at present. There are a lot of people thinking of moving but unsure on what to do in the current climate. Again, a whole different topic, but my advice is if you need to move, move. If you don’t, don’t– I like to keep it simple. If you are buying for yourself to live in, house prices are irrelevant in my view (in fact, the lower the better). Investment is a whole different ball game. In the interests of keeping this brief, here are the main considerations if you need to refinance, but are likely to move in the near future:

• Portability– every major residential lender will allow you to move the mortgage from your current property onto a new one during the product period, meaning you can avoid paying any large exit fees.
  • A word of caution– this will be subject to you meeting their new lending criteria at the point of moving. Therefore, the risk is that if your situation changes or the lenders policy changes, they may decline the application to move and you could be stuck and/or have to part with large exit fees.
• Penalty free products– possibly the best approach to setting up a new deal if you are likely to move. It will keep your payments down, but as the above illustrates, if there are changes, you are not bound to the lender
  • Lenders offer both fixed and variable rate products now without any penalties and, with interest rates at historic lows, nothing is expensive these days.

How long should I set the loan up for?

There are two aspects to this, the initial product and the overall term of the loan. Please refer to our quarterly review of interest rates if you want a detailed view on the product. For the overall term of the loan, there are again a few key considerations:

• Lower rates– it is highly likely that if you are coming out of a two- or five-year contract, the rate you are being offered today is lower than what you were paying. In keeping with our principle of getting our clients debt free, we would strongly recommend you keep your payments the same to what you are used to and reduce the mortgage term. This will knock years off your loan and save you thousands of pounds in interest.
  • For example, if you had a £500,000 mortgage with 28 years remaining, currently paying a rate of 1.74%, your payments would be £1,880 a month. You would be likely to get a new rate of around 1.3% for a two-year fixed rate, which means your payments would go down to £1,777. However, if you kept your payments around the same level you could reduce the term to 26 years at a monthly cost of £1,890 per month. That will save you £11,717 over the term of the loan. We would much prefer for that money to be in your pockets than bolstering the share price of the bank! It’s obvious but I’ll say it anyway, if you cut the term shorter, the greater the saving. Just reducing the term down to 25 years would mean an increased saving of £25,494, such is the power of compound interest. So on and so forth. This method is a huge part of the jigsaw of getting debt free faster.
• Retirement ages– conversely, many banks have most likely increased the maximum term they will allow since you looked at your mortgage. As per the theme of this post, we don’t advocate increasing the term unless there is a good reason to, but you can go to age 75 or 80 these days and many lenders offer 40-year terms. There could well be good reasons for this such as starting a family, reduced income, increased outgoings and so forth, but please do get expert advice to ensure you are truly doing what is best for you.

As the above illustrates, just coming to the end of your product term and rolling into the next product with your exiting lender is rarely the best thing to do. Some simple advice from a professional adviser that works for you, not the lender, can save you tens of thousands of pounds: we never want to see a bank getting fat off your mortgage!

Should you wish to speak to any of our advisers, please feel free to contact us for a free initial conversation. You can contact any of the team here.

If you’d like to read more from Richard Campo, he’s written plenty more for the Marsh & Parsons blog, including articles on what to look for when selecting a mortgage and how mortgage rates work.