When should I remortgage?

Remortgaging is when you get a new mortgage on your current home. It’s a very important decision that could impact your finances by thousands of pounds every year.

Why should I remortgage?

Before you look at the when, you need to first consider the why. Why should you remortgage if you can afford the monthly repayments, are happy with your lender and are not planning to move house?

We go into this in detail in our Should I remortgage? guide, but in brief:

1. Your current deal is about to end/has already ended (which most likely means you’ll be on your lender’s costly standard variable rate, known as SVR)
2. You want to save money
3. You want to release some of the equity in your home to make changes to it, like renovations or an extension
4. You want to pay off your mortgage earlier
5. The value of your property has gone up significantly
6. You want to switch from an interest-only to a repayment mortgage
7. Economic uncertainty

When should I remortgage?

In general, you should start looking for a new mortgage around three months before the end of your current mortgage’s promotional deal. For example, if you have a three-year fixed rate mortgage, you should start shopping around when you’re 33 months into the 36-month promotional period.

When a lender offers you a mortgage, you usually have between three and six months to accept it – after that, you’ll have to reapply. That’s why you should start looking for a new mortgage when your current mortgage deal has around three months to go.

If you don’t find a new deal, you’ll automatically revert onto your lender’s SVR when your promotional period ends, which is often far more expensive than if you’d shopped around for a new fixed rate or discount rate mortgage. In fact, mortgage broker London & Country recently discovered that a third of mortgage customers are on their lender’s SVR.

According to financial data site Moneyfacts, the average two-year fixed rate mortgage in the UK is around 2.52% compared to the average SVR which is 4.9%. Using these figures as examples, if you had a £300,000 repayment mortgage over a 25 year term, your monthly payments would go from £1,349 to £1,736 – that’s an increase of almost £400 each month, or £4,800 per year.

Of course, with Brexit looming the economy is currently somewhat unpredictable, so it could be beneficial to see what mortgage deals are out there even if yours isn’t coming to an end. But don’t forget to look at all the costs because early repayment charges (to leave your mortgage before it ends) and set-up or arrangement fees (payable when you’re setting up a new mortgage) could cancel out the financial benefit of getting a new, low fixed-rate offer.

This need for security is made clear by the fact there has recently been an increase in popularity for longer-term fixes, like five and 10 years as opposed to just two or three. Plus, the similarity between the two-year (2.52%) and five-year (2.93%) rates shows how lenders are reacting to this shift from borrowers and how hard they are trying to remain competitive.

Mortgage analytics specialist at Moneyfacts, Darren Cook, says: “We have seen the margin between the average two-year fixed and five-year fixed rates narrow as competition gathers pace in the five-year fixed rate landscape. Historically, competition on rates has been strong in the two-year fixed rate market and it seems that rates in this sector have been cut to a bare minimum and the five-year fixed rate sector is the next option for mortgage providers to compete in, causing rates to fall.”

Fixing your mortgage for longer not only means you have prolonged certainty when it comes to your payments, but it also means you will not need to think about changing your mortgage for longer periods of time. However, if you’re unsure whether or not you’ll remain in your current property for the length of the new mortgage deal, make sure it has the added bonus of being portable, which means you can take it from one property to another without (or with minimal) fees.

How to get the best remortgage deals

When it comes to remortgaging, your loan to value (LTV) is primarily based on the amount of equity in your home – plus, if you have some savings put aside, you can put those into the new mortgage deal as well.

Much in the same way that a larger deposit gives you access to better mortgage rates on your first home, more equity equates to lower interest rates. If you have a repayment mortgage, and the value of your home has stayed the same or gone up, you should have a decent chunk of equity in your home.

For example: you originally bought a £200,000 property with a £20,000 deposit – i.e. you borrowed £180,000 at an LTV of 90%. Since then, your property has increased in value to £250,000. You’ve also paid off £10,000 of your mortgage debt through your monthly repayments, so you only owe the lender £170,000. This means your total equity in your home is now £80,000: £20,000 from the deposit, plus £10,000 in debt repayments, and a final £50,000 from the increase in property value.

With £80,000 in equity on a £250,000 home, and only £170,000 left to repay, you’re in a very strong position for remortgaging. You will have an LTV of 68%, which will give you access to some of the best mortgage rates. If you contributed another £7,500 – from a savings account, perhaps – then your LTV would move down to 65%, where you likely get an even better mortgage rate!

Why can’t I remortgage?

If the value of your property has dipped below your outstanding mortgage debt, you’ll have what’s known as negative equity. For instance: In 2017, you bought a house for £300,000 with a £270,000 mortgage on a two-year fixed-rate deal. The deal is coming to an end, but the property has decreased in value to £250,000.

Most lenders will not allow you change mortgages while you’re in negative equity, so you could end up paying its costly SVR until the property goes up in value.

One way to partially remedy this in the interim is to overpay your mortgage, that is, make payments over the monthly requirements. Generally speaking, this should be doable if you’re already on the lender’s SVR (higher rates usually mean greater flexibility) – but if you’re in negative equity whilst on a fixed-rate deal, you must check the terms and conditions before you overpay. Although most fixed-rate deals allow you to overpay by 10% per year, they’ll charge you a penalty for anything over that.

Try to remortgage to a cheaper deal as soon as you’re out of negative equity.

Did you find this useful?

Last updated: 28 April, 2019

How Much Can I Borrow? Mortgage Affordability Calculator

Use our how much can I borrow calculator to work out how much you can borrow in the UK as a first time buyer, moving home or remortgager, even with no deposit or bad credit. Explore our guide to learn how much you can afford based on your financial situation. Plus, understand how lenders assess your affordability and decide how much you can borrow in the UK.

How much mortgage can I get?

How much you can borrow for a mortgage in the UK is generally a maximum of 5 times your income - or 5 times your joint income, if you're applying for a mortgage with someone else.

Use the how much can I borrow mortgage affordability calculator above for an estimation on how big a mortgage you can get in the UK.

Mortgage lenders always conduct affordability checks before loaning you any money to ensure you can meet the monthly repayments. Since the 2008 financial crash, mortgage lenders are far more strict about who they lend to. They judge your affordability based on an in depth discovery of your income, all your outgoings and your total debt. They also scrutinise your credit file.

Lenders also want to know you could afford the repayments should the interest rates increase by 4% above the Bank of England base rate. This is known as stress testing.

You may only be able to get the maximum amount if you already have a current account with the lender, or you have a very large deposit.

To get a more accurate maximum mortgage figure, apply for an agreement in principle (AIP). An AIP is not the same as a formal mortgage offer. It is a theoretical figure of what a lender may be willing to lend you.

Most estate agents will not take an offer seriously without an AIP. You can secure one quickly online or via a mortgage broker.

How much mortgage can I afford?

How much mortgage you can borrow and how much mortgage you can afford are slightly different. Before you borrow the maximum amount, you should think about whether you can afford the monthly repayments on a large mortgage.

A general rule of thumb is that you don't want to spend more than 30% of your take home salary on mortgage repayments. Any more than that and you risk being "house poor" - where you own a house, but lack the money to do other important things (like build up your savings, go on holiday, etc.)

In London, where house prices are very high, it can be hard to keep your repayments under 30% of your income.

Before getting a mortgage, you really should do the maths on what the total cost of home ownership. If your mortgage payments and household bills look like they will take up 40 or 50% of your income, you should consider getting a smaller mortgage.

How much mortgage can I get with bad credit?

If you have bad credit you may still be able to get a mortgage, but it will be harder to find a lender willing to give you a loan.

You will likely need a larger deposit if you have a history of bad credit, and the best mortgage rates won't be available to you.

Generally the best way to find a bad credit mortgage is to talk to a mortgage broker.

How much deposit do I need to get a mortgage?

In most cases, you will need a minimum of a 5% deposit to secure a mortgage, meaning you’ll need a 95% mortgage loan. The size of the loan versus the property value is referred to as loan-to-value ratio, or LTV.

If you are able to save more, for instance a 10, 15 or 20% deposit, you’ll increase your chances of being accepted for cheaper mortgage products. Lower interest rates (and small set-up fees) equal cheaper mortgages.

The cheapest mortgages are generally only available if you have a big deposit, or – if you’re remortgaging or moving house – a large amount of equity in your property.

How much can I borrow with no deposit?

If you have no deposit - otherwise known as 100% LTV - you can still get a mortgage, but your options will be much more limited than if you had a deposit of 5, 10 or 15%.

No-deposit mortgages generally have a much higher interest rate, which means you'll pay a lot more in interest over the long term.

While 100% LTV mortgages are available for first-time buyers, you can find better and cheaper products if you can save up a deposit of at least 10%.

How do lenders assess my affordability?

Most AIPs only require a soft search on your credit file, which means other lenders will not see it. A real mortgage application will leave a mark on your file that all other lenders will be able to see. Generally, having more marks can count against you because it could suggest you are desperate for credit. Being turned down for a loan product will have a negative impact on your credit file.

Mortgage lenders will review your credit file in depth to make absolutely sure you could afford the monthly repayments of the mortgage you’ve applied for. Each lender has their own scoring system – it does not see the score you do, that’s just for you – and may check one or more of your credit files (from Experian, Equifax or TransUnion), so it is vital you check all three before you apply for a mortgage.

Lenders want to know how stable an investment you are by looking at how long you’ve been in a job, lived at your current address and had a bank account.

Income vs. outgoings

On application, mortgage lenders will look at your salary, guaranteed bonuses, pension, investments and any other income you have. You’ll need to prove your income with payslips and bank statements. If you are self-employed, there are some additional hoops to jump through (see below for more details).

Lenders will also closely examine your outgoings. More than just your rent (or current mortgage repayments if you’re remortgaging), which is likely your biggest monthly expense, they’ll look at other regular bills (credit cards, mobile phone, broadband, utilities) as well as your living expenses.

If you are down to £0 the day before pay day, or worse still, you’re in your overdraft, and your bank statements show you eat at restaurants four times a week, you could find it very hard to get a mortgage as it will look like you cannot manage your money.

For that reason, it’s worth trying to get your finances in order at least six months before you apply for a mortgage.

“Stress testing”

You might be able to afford the monthly payments if you secure a mortgage with a low interest rate, but what would happen if rates increased to 3% above the lender’s standard variable rate (SVR)? The average SVR today is 5.11% – so you would be stress-tested on an interest rate of around 8%. This is known as “stress testing”.

Could you afford the repayments should your personal circumstances change? That is not just what a lender considers, but something you will need to ask yourself too.

Having enough savings to cover three months of mortgage payments could really be worth your while in case your circumstances change – for instance, if you lose your current job.

Lenders may limit the amount you can borrow based on their findings.

Should I borrow the maximum amount?

It can be tempting to borrow your maximum mortgage amount and buy the most expensive property you can afford – but that may not be the right thing to do as it leaves you little wiggle room if rates go up or your income goes down…or both!

To begin with, one of the easiest ways to lower your monthly repayments is to borrow less money, giving you a lower LTV. If you have £20,000 as a deposit, that’s only 5% of a £400,000 property, but 10% of a cheaper £200,000 property.

The other thing to consider is that mortgage products are usually arranged in a tiered fashion, with a lower interest rate offered every time your LTV goes down by 5%. So, 95% LTV mortgages generally have higher interest rates than 90% LTV mortgages, which have higher rates than 85% LTV mortgages and so on.

If you’re looking at buying a property and your LTV would be 87%, you might consider raising a slightly larger deposit to push yourself over the 85% LTV threshold, otherwise you’d be stuck at 90%. Likewise, it might be worth looking at a slightly cheaper property, where the same size deposit would provide a better LTV and allow you to keep some money aside.

Borrowing the maximum amount possible could leave you “house poor” – where you own a house, but you have no funds left to pay for everyday stuff without going into debt.

How can I drop my LTV band if I’m remortgaging?

If you’re remortgaging your home, the exact same rule of thumb applies – you want to aim for the lowest LTV possible – but instead of raising a big deposit you get to use the equity in your home.

For example: you raised a deposit of £40,000 and borrowed £360,000 to buy a home valued at £400,000 (an LTV of 90%). Now the five-year fixed-rate deal deal has ended, you want to remortgage to a new fixed-rate mortgage. You’ve since paid off £40,000 from the principal debt – so you owe the lender £320,000 – and your home has gone up in value to £420,000.

Assuming you want to get a new mortgage for the same amount – £320,000, with £100,000 in equity – you would have an LTV of just 76%.

However, a 76% LTV mortgage will most likely have the same rates as an 80% LTV mortgage. To drop to a 75% LTV (and therefore lower the interest rates) you would need to add £5,000. Alternatively, you could try and get a slightly higher valuation for your home, which would help you drop to a 75% LTV.

If you’re remortgaging to unlock money for home improvements or other expenses, try to keep your LTV tier in mind. If you can stay within a lower LTV tier, perhaps by borrowing slightly less, you’ll save a lot more in interest repayments in the long-term.

How much mortgage can I get if I’m self-employed?

First things first, you can still get a mortgage if you are self-employed, you’ll just have a few more hoops to jump through than if you were a full-time employee.

Lenders will consider you more of a risk, so you will need to gather together at least two complete tax-years of business accounts and tax returns. Some lenders require that the documentation has been signed by a chartered accountant to prove that the information you’ve provided is reliable.

Your maximum mortgage will then be based on your net profit, not total turnover. The exact calculation will vary from lender to lender, and also on your legal status – self-employed is different from the sole director of a limited company, for example.

Some lenders may base your maximum mortgage on your past trading history, while others might want projections of future customers and income. Organise both, just in case.

If you’re self-employed, speaking to a mortgage broker is pretty much a must. They will know which lenders will most likely accept you, therefore cut the chance of a credit score-damaging rejection.

Edited by: Sarah Guershon. Mortgage calculator updated to version 1.11 on July 25, 2019.

Did you find this useful?

Last updated: 2 August, 2019

Should I use a mortgage broker, or go direct?

If you’re looking for a mortgage, you might be wondering whether or not you should talk to a mortgage broker or go directly to the lender.

These days, brokers do more than simply churn out a list of available mortgages for a hefty fee, so it could be worth your while to see what they can offer.

Why should I use a mortgage broker?

Legislative changes, most notably in the Mortgage Market Review in 2014, have resulted in a tightening of the rules with regards to mortgage “affordability” checks, the qualifications of all mortgage brokers, and the information brokers must provide to borrowers about their services and their fees.

Since the changes, both lenders and brokers must consider your financial situation and assess your affordability when suggesting suitable mortgages for you. Moreover, they must be able to prove they have done this.

Whilst this legislative revolution has made it harder to obtain a mortgage, it’s also made it far safer to use a mortgage broker.

You can now trust they will undertake a full comprehensive financial assessment and therefore only give you a range of mortgages you will almost certainly be eligible for.

With the huge expense of buying your first home or moving house, it may be tempting to consider the ‘cheaper’ option of applying for a mortgage with your own bank, or by going direct to another lender for your mortgage.

However, avoiding paying broker fees (though there are plenty of reputable fee-free brokers out there) to save a few pennies now could could cost you thousands over the next few years if you opted for a bad mortgage.

Even if you think you do not need the advice of a broker and know enough about the mortgage market without one, you may be missing a trick.

Some brokers have access to a larger range of mortgages (such as via exclusive deals with lenders) and can help speed up the application process by getting you fully prepared and steering you towards mortgages you will most likely be accepted for.

Can I get a mortgage directly from a lender?

If you have done your research and found your perfect mortgage, are confident that you have found the best deal, or you simply want the convenience of asking your current bank for a mortgage, then that’s your prerogative.

Indeed, there can be some merits to going directly to a lender for your mortgage…just be aware of the pitfalls too:

Pros

• Some banks offer preferential mortgage rates if you already have a current or savings account with them.
• Some lenders have exclusive ‘direct only’ deals that a broker would not have access to.
• You avoid paying broker fees.

Cons

• The advice you get from lenders will only refer to their own products rather than an unbiased view of the market as a whole.
• You will not gain access to any broker-only deals, even if they’re offered by your chosen lender.

How do I get a mortgage through a broker?

If you are planning to employ the services of a broker, do your homework first: ask friends and family for a recommendation, check the internet for reviews, and suss out their fee structure.

Ask them outright how many lenders they work with – the more lenders, the more options you have at your disposal and the more likely you could be to get a good deal.

Generally, there are three types of broker:

• Tied brokers: These are usually recommended to you by a particular mortgage lender and only offer deals from that one mortgage provider.
• Multi-tied brokers: These offer a limited range of mortgages from a panel of mortgage lenders.
• Independent brokers: Also known as ‘whole of market brokers’, these investigate the entire mortgage market to find the best product for you. However, “whole of market” does not cover every single deal, as the name suggests.
  This is because some lenders, like First Direct, do not work with brokers and only offer mortgages to borrowers directly.

Since the legislative changes, mortgage brokers have to state from the outset exactly what range of mortgages they can offer. For the most wide-ranging advice and products, it is always advisable to choose an independent broker that offers a ‘whole of market’ service.

Pros

• A broker’s advice will be tailored to your individual financial situation and needs and can therefore advise you on your suitability to all products.
• Can gain access to the whole of the mortgage market, meaning that they have a greater chance of finding that perfect mortgage for you.
• Have access to ‘broker only’ deals
• Do the searching for you and liaise with your chosen lender, which can save you huge amounts of time and stress.
• Expert in their field so could help you find the very latest deals and have in-depth knowledge of the habits and anomalies of different lenders.
  For example, if you are time-strapped, they may be able to tell you which lenders work quickest or if affordability is your main concern, brokers may know which lenders take certain expenditures into consideration during your affordability assessment (including school fees, childcare costs, commuting costs, pension contributions).

Cons

• Mortgage brokering is a business, and brokers may charge a fee for their services. This can be in the form of an hourly rate, a flat fee, a commission-based fee paid by the lender, or a combination of all three.
  Whichever way they charge, brokers are obliged to outline all fees in an initial disclosure document. If your broker is charging a fee and is paid a commission by the lender, it’s worth asking if they will offset some of their commission against the cost of your deal (you never know!)
• You may miss out on direct-only deals which could be cheaper than those offered via a broker. That said, a good broker may include these offers in any market assessment, but you will have to make the application directly.

When deciding on whether or not to use a mortgage broker, a balanced approach may be the best solution.

Do your own research online first, ask your current bank and other direct-only lenders what deals they have available and then speak to a reputable mortgage broker to see what else is available and suitable for your personal circumstances.

That way you’ll get the holistic advice and information you need in order to get the very best mortgage for you.

Edited by: Sarah Guershon

Did you find this useful?

Last updated: 8 May, 2019