Have you thought about remortgaging?
For many of us, a mortgage is the largest financial commitment we will make in our lifetime, and yet many of us are unaware of the options available to help make repayments much more cost effective.
What’s in the guide?
• Why you should think about remortgaging
• How the remortgaging process works
• What documents you will need
• Types of mortgages available
• What fees you should be aware of
• Tips for applying for a mortgage
Why should I remortgage?
Remortgaging basically means moving your existing mortgage from one lender to another.
There are many reasons contractors, business owners and independent professionals may want to remortgage. The mortgage market is ever changing and it it could be that you’re paying a higher rate than you need to. The original
low interest rate you signed on with may have switched to a higher one, potentially leaving you out of pocket.
However it is not always about saving money, it could be that your contract rate has increased or you have recently inherited some money. Earning more, or having more available cash means that you will potentially be able to afford higher repayments, saving you on interest paid overall.
A change in job or lifestyle may mean that there are periods where repayment pauses may be needed, so finding a provider that offers flexibility and/or ‘payment holidays’ may also be needed.
Whether you want to find ways of cost-saving by moving to a more competitive rate or using it to release equity on your property to fund home improvements, consolidate debt or invest in another property, then remortgaging is a financial conversation worth having.
How does it work?
Qualifying for your remortgage via a specialist broker could not be easier. As a specialist service for contractors, business owners and independent professionals we have negotiated special contract based underwriting with certain high street lenders.
We can either use your gross annualised contract rate or your limited company accounts to assess the best option for you and how much you can afford to borrow. This ensures the amount you can borrow is based on what you actually earn, rather than what you draw as an income. Rather than looking at the income you took from your business, we could use the contract rate you charge to work out how much you can borrow.
Doing this allows you to borrow more, because any tax saving methods that you employ won’t be taken into account when calculating remortgage affordability.
Types of mortgage
Before you begin the process of remortgaging, you will need to consider which type of mortgage is right for you. It may be that a different mortgage type is more suitable now than your original mortgage type.
Repayment or Interest-only?
Repayment mortgage options guarantee that you are paying off some of your loan every month whereas with Interest-only mortgages you pay the interest on the debt and none of the original loan. Most lenders will not usually offer interest only deals, unless the LTV (Loan-to-Value) ratio is below 50% or you are looking at an investment property.
What type of scheme?
As well as deciding how to repay your mortgage, you also need to think about the type of scheme for your mortgage. Usually lenders offer new customers special low interest rates for a set number of years to attract them, but many include a range of different advantages and disadvantages.
• Fixed Rate – Gives you the security of knowing that regardless of what happens in the market, your payments and interest will stay the same. However, if rates fall, your payments will not.
• Variable Rate – this rate allows payments to fluctuate (higher or lower) depending on factors such as the UK economy. Within this rate, there are three different options:
• Tracker Rate - this rate tracks another rate indicator, usually the Bank of England Base Rate. Although this is a transparent indicator and not influenced by the lender, if interest rates change dramatically future costs will be higher.
• Standard Variable Rate - This is the type of product the rate usually reverts to when your introductory period is over.
• Discounted Rate - this product offers a discount off the Standard Variable Rate for an agreed period of time, usually 2 to 3 years.
Once you’ve decided on a fixed or variable mortgage, you then have to decide whether or not you want your mortgage to be flexible.
Some of the options available on a flexible mortgage allow you to increase or decrease the amount you pay each month.
For example, if you receive a sum of money you can choose to either pay this as a lump sum off your mortgage or as a regular payment, allowing you to decrease your overall balance and saving interest in return.
The same applies if you need to underpay or need a payment holiday for a set period as agreed to by your lender.
Some lenders will even offer a free valuation on your home and some providers offer cashback for switching.
In terms of the savings you can make through cutting the cost of monthly repayments, in the long term it can be seen as financially beneficial to switch providers.
However, there are also certain circumstances that mean remaining with your current provider is more cost effective.
If you are thinking of leaving your mortgage with only a small amount to pay off in a short time period, it might mean the savings are outweighed by the cost of switching and therefore staying with your current provider will ultimately be the best option.
What fees should I look out for?
If you do decide that remortgaging is the right course of action, you have to be aware that the process is one in which you will pay off your existing lender’s mortgage with the new lender’s mortgage.
You need to be mindful that some mortgage lenders charge early repayment fees, and so remortgaging too early could cost you more than you wish!
As well as early repayment fees some lenders may add on:
• Arrangement fees – This is a fee the lender charges for setting up your mortgage. The amount you can expect to pay varies depending on what lender and property you are remortgaging. It could be a set amount or a percentage of the loan.
• Exit fees - When closing your original mortgage, your lender may charge you an exit fee for closing the account with them. The cost will depend on the lender, but can range from £50 to £300.
• Booking or reservations fees - When you have found a new mortgage you may be charged an upfront fee by the new lender for securing the new loan. This is usually £99, but may vary.
• Valuation Fees - This is a fee the lender charges for carrying out a valuation of the property (could be free of charge). The purpose is to reassure the lender that the property is a good asset to lend against. The cost varies depending on the lender and the value of the property.
• Legal fees - This is a fee the solicitor will charge for the legal work they carry out. The cost varies depending on the solicitor (could be free of charge). For example, the fees you incur could be increased/different if you need to change the names of the people on the mortgage/title deeds (a transfer of equity).
However, with all that said and done, if you’ve weighed up the costs thoroughly, the upfront costs may still be less than the final total savings from switching providers.
Tips for applying
It could be that when you first applied for a mortgage, you easily breezed through the process, but now lenders are a lot tighter with their processes. This has made it hard for contractors, business owners and independent professionals, who may find it challenging to prove all of their income to a lender it an acceptable way.
To get the best scheme with a lender and to avoid your application being rejected, there are a few things that are useful to know beforehand:
Having good equity
To get the best schemes on the market, you will be looking at only borrowing 60% of your home’s current value. Higher loan to value are readily available but the rate is likely to be a little higher.
A good credit score
Managing this in advance saves a lot of headaches in the future and with a spotless credit score, you are less likely to be rejected. However, if you have/had bad credit, talking to an adviser is the best option. You can easily check your score for free on certain websites.
Speak to a specialist mortgage advisor
Unlike the majority of lenders that have little understanding about contractors, business owners and independent professionals, specialist brokers understand the procedures and use bespoke underwriting to enable mortgage funding based on contract rate and company accounts
Prepare your documentation
Update your CV and obtain a copy of your contract. This way your broker will be able to use them to avoid affordability issues.