If you find yourself trying to decide on selling your mortgaged property it is likely you might be faced with one more of the following situations.
- You need some kind of financial aid.
- You want to move away to another location.
- You want to invest in a different property.
While selling your property could help you in these situations to generate the much needed money, by remortgaging your property you may see benefits that you could consider.
What is Remortgaging?
Remortgaging is when you switch from your current mortgage deal to a new one. You can either remortgage with your current lender or choose a different one.
If you remortgage with your current lender this simply means that your mortgage is moved to a different mortgage product. Sticking with your original lender might save you some fees spent on processing, such as a valuation fee. On the other hand, if you choose to remortgage with a new lender, this means that your new lender pays your mortgage with possibly a better deal.
In this article we will explore the financial benefits available through remortgaging that provides a second option to selling.
1. Increase Savings by Capitalising on Lower Interest Rates
Ideally remortgaging is advantageous to you when you are able to transfer to a deal with lower interest rates. Lower interest rates mean a reduced monthly expenditure. You may find mortgage deals with lower interest rates if:
- You have reduced the total you owe by paying off some of your mortgage.
- Your property has gained value since you first mortgaged it.
- Market interest rates have dropped.
How it works:
An interest rate is influenced by your loan-to-value ratio (LTV). A loan to value ratio is how much you borrow (your mortgage) in comparison to the property value. The less you borrow the better it is. This means a lower LTV, and a lower LTV means a lower interest rate.
For example, If you mortgage a property valued at £300,000 for £240,000, your LTV is 80%
Looking at the previous example: If after a period of repayments your outstanding mortgage amount is at £210,000, and the house price was still worth £300,000, your LTV drops to 70%.
And if the same property which was initially valued at £300,000 increases in value to £350,000, the LTV drops even lower. You still need to pay £210,000, but because your LTV is now 60% instead of 70% the interest rate you pay is lesser.
2. Using Equity as an Additional Loan
Equity is how much of your property value belongs to you.
At the beginning of your mortgage this value is how much you make as a down payment. As you carry out your monthly payments, you reduce the amount you owe, and this increases your equity.
When you remortgage you are often able to release your equity as an additional loan by increasing your mortgage value. For example if you have an equity of £100,000 from a property that is valued at £250,000 and you could consider releasing £20,000 from that equity to be utilised as an additional loan.
How do repayments work
As the amount you borrow increases so does your LTV, which means that you are committing to a larger monthly payment. However, if the amount you are borrowing is a small percentage of your equity, the rise in your LTV will not be so significant.
3. Using Your Property as a Passive Income Stream
If you are hoping to move away for a long period of time or you want to move to another location completely you can use your property as a passive income stream by converting it to a rental property.
This is done by converting your residential mortgage to a buy-to-let mortgage through remortgaging.
Buy-to-let is a type of mortgage specifically for properties which are intended to be leased. Unlike residential properties where your affordability is based on your personal income, affordability in buy-to-let properties is based on your estimated rental income.
When you are venturing out to own a buy-to-let property, it is important to note that eligibility criteria is tougher than for residential mortgages. This is because buy-to-let properties are considered risky for the lender as you cannot always guarantee stable income levels.
Criteria that is typically required for buy-to-let properties:
- Your rental income should cover 125% of your mortgage
- An LTV of 75% or less.
- Your credit score.
- Your age.
- Where you are planning to live next.
- Your financial situation.
- How long you have owned property.
How much does a buy-to-let mortgage cost
Buy-to-let mortgage interests are generally costlier than residential mortgages. For this reason, many landlords may opt to pay an interest only mortgage. This is paying the interest value each month, and then paying the lump sum of the property by selling it at the end of the mortgage.
In addition to your monthly payments, other costs also contribute when going in for a buy-to-let, such as letting agent fees, income fees, administration fees, maintenance costs,etc.
4. Using Your Property to Invest in Another
You can use the equity released from your remortgage to finance a new property investment. This can be done in two methods:
- Use equity to purchase your new property.
- Equity released from your remortgage can be used to finance the down payment for your new home.
In order to pursue a buy-to-let mortgage in the UK it is vital that you speak to a mortgage broker to understand the many variations that come with setting up a buy-to-let mortgage.
5. Flexible Repayment Options
One of the biggest benefits of remortgaging is the ability to find flexibility in your monthly finances. When you remortgage, in addition to paying lower interest rates, you are also able to choose how you want your mortgage to be set up. This could be lengthening your mortgage term, lower interest rates or shortening your term to pay up your debt quickly.
What to Be Mindful of When You Remortgage
Finally, before you remortgage your property you need to be aware of any potential costs you may incur. The typical charges levied for remortgages are:
- Early repayment charges if you leave a lender or deal before the term is due.
- Closure fees.
- Arrangement fees for getting a remortgage.
- Admin fees for the new mortgage set up.
- Valuation fees for the property.
As in every situation remortgaging your property has its pros and cons. However, the main benefit of remortgaging as opposed to selling is the ability to hold on to your asset for immediate or future investments.
Some Buy to Let mortgages are not regulated by the Financial Conduct Authority
| YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. |
* Approved by The Openwork Partnership on 1 November 2023
