Before you start looking at remortgages, there are THREE checks you need to make on your current mortgage.
Will you be paying an early repayment charge?
Most mortgages have an early repayment charge during the initial special discount period (a few have extended penalties after the deal ends too). If you remortgage then, you’ll trigger the charge and it can be thousands of pounds. So before you go any further, you need to know:
Is there a charge?
How much is it?
What date does it apply until?
Armed with this information, you’ll then be able to work out if it’s worth ditching your deal early and paying the charge. Or you’ll be sure to dodge the charge by remortgaging the working day after the early repayment charge ends.
Will you be paying a deeds release fee?
Most mortgages will have an administration fee for releasing the deeds to your solicitor. It typically ranges between £50 and £200.
The lender should only charge you these kinds of fees if you were told about them when you first took out the mortgage. They would need to be on the offer document and the Key facts illustration. If they aren’t, point this out and ask for the fee to
“Dodge the charge by remortgaging the working day after your current
How much do you owe your current lender?
Without this information, you won’t know how much you’ll need to remortgage for. Don’t just estimate a figure. Phone and ask “How much would I need to pay to clear the mortgage on, for example, 1 November 2020?”
Giving the date means it’ll take into account any normal repayments you’re due to make between now and then. Relying on a rough estimate could mean you end up with a shortfall or taking a pricier remortgage than you needed to.
How much will they lend you?
Historically, lenders simply multiplied your income to work out how much to lend you. Typically, a single person could borrow four times their single salary while a couple would be offered four times their joint salary.
Now it’s all about affordability. Lenders look at your income compared to your outgoings (bills and other debts) and work out how much spare cash you have each month.
This can get tricky. Some lenders are so picky that even when you’ve paid debts off — say, on a credit card — just before applying, they factor in how much available credit you have.
Even once they’ve done the maths, they’ll need you to have a cushion in case mortgage rates rise, and to ensure you’re not right on the edge of your finances. As a result, they’ll work out what you can afford based on a higher mortgage rate, usually 6% or 7%, even if you’re applying for a 3% deal.
How much equity will I need in my house?
The days of 100% mortgages are long gone. The key question is how much of your property’s value you are looking to borrow from the new lender.
Borrowing less indicates you are more solvent and means the mortgage loan is less of a risk for the mortgage company. This is because a mortgage is a secured loan (in other words, if you can’t repay, the lender gets your home), so by lending money it’s taking a gamble on house prices.
If you’re only borrowing 75% of your home’s value, prices would need to drop by 25% before it wouldn’t be able to recoup the full amount of the loan if you couldn’t get it back. So this offers more protection.
“Now it’s all about affordability. Lenders look at your income compared to your outgoings.”
“Equity is equivalent to a deposit for someone buying a property.”
Here’s the crucial Q&A:
What counts as equity in my house?
It’s important to understand your borrowing will depend on two factors.
— The equity in your home. If you owe £135,000 and the house is now valued at £180,000, you have £45,000 equity.
If you’re applying for a remortgage to replace the £135,000 loan, the £45,000 equity is equivalent to a 33% deposit for someone buying a property.
— Can you put any other cash towards it? If you’ve savings you can use (always keep an emergency fund), this can lower your borrowings and may result in a better mortgage.
From here on, for the sake of simplicity, let’s just call it equity — but really it’s about how much in assets or cash you’re putting toward the mortgage.
- How much equity do I need to get a good deal?
- To get a mortgage, you need equity of at least 5%. To get a good rate, currently you’ll need more than 20% of the home’s value and 40% for the kick-butt market-leading deals.
The golden rule is simple. The bigger your equity (and savings), the better the rate; the lower your monthly repayments, the cheaper the remortgage.
The difference between a 10% and 20% mortgage is huge, then the next big jump is at 25%, then 40%.