Why Remortgage UK: Potential Reasons Why You Might Switch Home Loans

Every day in the UK, there are people who begin to wonder if they can switch to another mortgage on their property. It’s common for people to consider an alternative home loan if the interest rate on their current one is far higher than it needs to be.

However, many people consider switching their loans because of the financial situation they are in. The monthly payment many of us make for the privilege of remaining in our own homes is usually the largest slice taken from our earnings. So, it makes sense to see if you could possibly reduce the size of that slice.

We’ve explored several financial reasons why you might consider switching to another product from your existing lender or from another one. We’ll highlight the possibilities, so you can see if they apply to your situation.

One caveat – do work out your financial situation prior to applying to remortgage your home. Depending on the situation you are in, there could be other ways to free up cash that are more suited to you at present. It is always a good idea to take independent financial advice.
Can you remortgage to pay off debt?
It is easy to see why some people consider this option. If your current home loan attracts a rate of, say, 2%, and you are paying 15% on an outstanding credit card balance, it would seem to be a no brainer to opt for the remortgaging route.

However, comparing interest rates is only part of the equation. You must consider the length of time you are going to pay the debt off for. Adding your outstanding credit card balance to your mortgage will allow you to get rid of the monthly credit card payments. Yet you will end up paying for that balance over the lifetime of your mortgage. That could be 20 years or more. This would lead to a far higher interest payment all told than you would pay if you worked at clearing your credit card balance over far fewer years – even with the higher interest rate.

The lesson here? Simply go through the figures and do all you can to reduce your credit card balance as it stands. Refinancing your home loan to pay off debt might seem to be the smart solution, but you will almost certainly end up paying more in the long run.

Can I remortgage to release equity?
You can – indeed, this is one of the more common reasons why people switch from their existing loan to a new one. It is an option if your home has increased in value or if you have equity already in your home that can be freed up.

If you wanted to release some of the equity that has built up in your home, you could do this by remortgaging. Your existing loan may be £80,000. Your property could be worth £250,000. You might decide to free up £50,000 in cash for various reasons, borrowing against the equity you’ve built up. Some of the reasons for releasing funds could be for debt consolidation as already mentioned, home improvements, providing a deposit for a new holiday home – The list goes on.

In the above scenario, your new loan would be worth £130,000. Your monthly payments would be higher, so you would need to prove you can meet those new payments before being accepted for the remortgaged amount.

For instance, let’s say you bought your property for £200,000 a few years ago. It is now worth £250,000. That means you have an additional £50,000 equity in the property, assuming all else is equal. You must also consider the remaining loan amount you have on your home. This reduces more quickly in the final years of the loan. Those with less time left on their home advance and more equity in their property are most likely to find a good deal to release some of that equity.

If you decide to sell, the equity will be freed when the sale goes through. If you have ample equity in your home and only a small mortgage remaining, you may be able pay it off and be mortgage free. Conversely, you may use some or all the equity as a deposit on your next property. This opens the way to a smaller mortgage and potentially a more advantageous interest rate on the monthly payments, thanks to that larger deposit.

Can you remortgage when in arrears?
Many people are surprised to learn the answer is yes, although that answer may not apply in all situations. If you are in arrears, it is vital to take advice from an independent financial adviser, so you know where you stand and what your options are. Arrears can lead to the loss of your home. You should never ignore them. The sooner you act, the greater the chances are of keeping your home.

If you have equity in your home, you may be able to get a deal to release that equity to help settle your arrears. It is worth realising not all lenders would be happy to provide a new loan given your history and arrears and this would depend on how old and how large the arrears are. If you find a suitable deal, it may be for a higher interest rate too. However, it is worth exploring the options if you are in a similar situation – and to do so as soon as you can. The more you delay, the more limited your options will become.

Can I remortgage during fixed term?
A fixed term mortgage runs for a specified period. It could be two years, five years, or something else. It is certainly possible to remortgage if you are still within a fixed term; however, you are likely to incur charges by doing so. Check the terms and conditions attached to your current loan to see what the situation is. You may well find the charges are too high to make a switch viable at this stage.

The exception is if interest rates have significantly fallen since you chose your current fixed rate deal. In this scenario, you may find you would still save money on a new deal – even when considering the charges.

Again, this shows how important it is to go through the figures prior to considering any method for switching to another loan.
Is it possible to remortgage when unemployed?
Unfortunately, not as lenders will need to see an income being generated to ensure the loan and the monthly payments can be serviced. However, as soon as you become employed, even if you have been employed for one day and still on probation there should be lenders that will consider this.

Affordability will always be a key factor, and since you have no income from work, this will be hard to prove unless there is a partner’s income that could be used? All situations vary, however, take the time to speak to a broker to make sure you understand all the options available to you.

The bottom line is to get independent advice from a mortgage adviser with experience in remortgaging in these situations. They will be able to advise you of the options and of your chances of switching loans. The MMR rules that came in a few years ago have made all applications far more stringent than they used to be. For many, it can seem like stepping through a minefield. Getting professional, friendly advice is often the best way to demystify things.

Should I remortgage to buy another property?
Another reason you may wish to switch home loans is that you want to buy another property. This could be a buy-to-let property, a holiday home, or simply another property in another area, while hanging onto the one you have now. The latter could give you two properties to stay in if you frequently travel to different areas. You could also try let-to-buy, where your existing home is the one to be let while you buy somewhere to live elsewhere.

To make this work, you must have equity in your property. Remortgaging will then release some or all that equity for you to use in purchasing the second property. Obviously, it is vital to consider affordability before applying. You must be able to prove you can comfortably meet the monthly repayments. Moreover, you must prove you can still afford those payments if they were to rise.

You can see there are many reasons to consider remortgaging your property. No two people will find themselves in the same position even if they are thinking about switching products for the same reason. That makes good advice even more important to seek out.

Published on 29 January 2020

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