January 31st, 2022
With low-interest rates making mortgage deals particularly attractive, we’re asking whether it’s time for self-employed homeowners to remortgage. Find out whether you could save by switching deals soon.
Low interest rates aren’t good news for savers, but they are good news for those with debt. As a mortgage is one of the biggest debts you are likely to have in your lifetime, getting a deal with a low rate could bring you thousands of pounds worth of savings. For self-employed people, this financial breathing space can make life much easier.
With the Bank of England base rate currently at a very low 0.25%, this might be the ideal time to shop around to get a low-rate mortgage. But does it make financial sense for self-employed people to switch now? We weigh up all the key questions you should be asking if remortgaging is on the cards.
Is my mortgage deal ending soon?
If the deal you’re on ends, it’s likely you’ll go onto the lender’s standard variable rate (SVR), and this is nearly always higher than a fixed rate deal you could get. By securing a new one before the end of your current mortgage deal, you can avoid paying a high SVR.
It’s worth shopping around early. You can normally lock in a new deal up to six months before your current deal ends, meaning you could get a deal while the base rate is low and before it creeps up again. For the self-employed, the process should begin even sooner though. You’ll need to prove your income all over again, and that means gathering your SA302s, ideally from the last two years. Lenders also like to see future work lined up, so it might be worth looking to remortgage when you have a strong pipeline.
Can I get out of my mortgage deal?
When you see lots of mortgage rates that are lower than the one you’re paying, switching deals may be tempting. But if you’ve got a few years left on your fixed-rate, you could find yourself having to pay high fees to do so.
Most lenders charge Early Repayment Charges (ERCs) for leaving a deal before it ends, which can be high. You can expect to be asked to pay between 2% and 5% of your outstanding mortgage. If you have £200,000 left to pay, a 3% charge would be £6,000. There may be other fees too, like the deeds release fee, which is payable when you repay your mortgage.
But this isn’t to say that you shouldn’t switch. If you have £70,000 outstanding and a 2% ERC, for example, the fee would be £1,400. This may be less than the amount you’d save with a lower rate, in which case, switching could be worthwhile. Therefore, it’s vital that you do your sums – make sure a lower deal saves you money in real terms once you’ve factored in the fees you’ll have to pay.
You should also consider your current earnings. If your income has been lower than usual recently, you could find it more difficult to secure new deals, in which case, it might make sense to hold off until your income recovers steadily.
Has my home gone up in value?
Generally speaking, the best deals are offered to those with a low loan-to-value ratio. That’s a percentage showing the amount you’re borrowing compared with the amount your home is worth. If you have a low loan-to-value, it means you’re not borrowing much against the value of your home, so you’re less of a risk to lenders, even if you’re self-employed.
Lots of homeowners are finding that their loan-to-value ratio has gone down recently because their house price has shot up. In 2021, house prices rose at their fastest rate in 15 years, with values increasing at an average of £20,000. If this rings true for your area, you could find that you now have more equity in your home. You don’t need to sell to benefit from this built-up equity – you could remortgage and use your lower loan-to-value ratio to access the better mortgage deals.
You can use a house price index to find out how much your property has gone up by, or speak to one of our advisers for a more tailored picture. They can also guide you through the next steps of working out your loan-to-value and using it to apply for the best deals out there for self-employed homeowners.
Can I overpay on my mortgage?
Another way to cut your interest is to reduce the amount it’s payable on by paying off more of the outstanding debt. If you’ve had a bumper few months of contracts and you have a healthy emergency fund, overpaying on your mortgage could be a good option. Lots of mortgage deals will let you overpay, which you can do in higher monthly payments or one-off lump sums – check the wording of your deal to see what’s possible. Another option may be to reduce the term of your mortgage, and this typically brings you the highest savings.
There will be a max amount you can overpay before you face an ERC, and this is usually about 10% a year. Stay within this percentage and you could enjoy savings over the long term and pay off your mortgage earlier.
If you can’t overpay on your mortgage, it might make sense to remortgage instead. You could then put down a larger amount in cash, both reducing the outstanding debt and the mortgage rate. Again, do your sums to make sure the savings outweigh the ERCs and exit fees.
Need help with the sums?
At CMME, our experts can offer you tailored advice on whether it makes sense to remortgage and, if it does, help you find the best deals for your situation. Get in touch with an adviser for our help.
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Whether you want to talk specifics or are just after some general advice, CMME can help. Speak to us today on 01489 223 750 for a completely free, no-obligation initial mortgage consultation. Or click the button below.