REMORTGAGE……. DO I OR DON’T I
Catherine, Fresh Partnership, Mortgage Brokers for PAD4U, writes:
Over the last few weeks I have noticed an increase demand for re-mortgage products, both from residential and investor clients. This is possibly due to the amount of press speculation that swap rates have increased. Also, I can’t see Bank of England’s base rate going any lower than 0.5%, especially with inflation on the up! The Big question that I get asked so many times ‘Is when do I think rates will go up’, and unfortunately I don’t know. Over the years I have listened to some of the best economists in this country, and you know they have also got it wrong. It all depends on the clients attitude too risk as to whether now is the right time to re-mortgage or not. I am sure a lot of us are now benefiting from ridiculously low follow-on rates after being released from tie-in periods with our existing lenders, and I am guilty (up until now), of thinking I will take advantage of the lower monthly payments and increased cash flow profit.
WHY RE-MORTGAGE NOW
To keep it simple, the lenders buy in wholesale money. For example, the lenders buy ‘fixed rate’ money on the SWAP rate market. Over the last couple of weeks, I have seen lenders withdrawing fixed rate products to re-launch their products with increased rates. Compared to historical data, the rates over the last year or so have been unusually low, but this cant last forever? The lenders buy the money at one rate and then sell on the money to their customers at another rate, and this how they make their money. They buy in tranches of funds and sell out with their margin. Obviously, the lenders are in it to sell money, to make money.
If you are no longer tied in to a product with a lender, you will most probably now be on either their Standard Variable Rate (SVR) or a follow on Base Rate Tracker. Base rate trackers are great as the Bank of England is in control of the base rate, and it is only if/when this rate changes that your interest rate would change. However, this is only great whilst the base rate is at 0.5%, once it starts to go up, I am sure at this time the lenders will be clever enough to increase their margins on re-mortgage products. The lenders SVR is more of a concern to me as the lender is the one in control of this rate and they can change the rate at any time they want. Lenders can increase SVR without explanation or any notice to their customers.
Products Available - There are several different types of re-mortgage products available, and the choice for residential mortgages is still much greater than buy to lets. There is a good offering of residential tracker mortgages available, typically for two to three years, but most of these nowadays come with a high arrangement fee, so cost and risk comparisons needs to be considered, it is worthwhile discussing these points with your broker, but unfortunately they won’t be able to pull out their crystal ball. There is also a good deal of fixed rates residential mortgages available, but again speak to your broker to decide on the tie-in period, rate, arrangement fee and advantages/disadvantages of re-mortgaging right now compared to waiting.
Interest Savings – If you are in a fortunate position of having a decent amount of equity in your property/properties, it is worth considering releasing some of the capital to invest in further property. For example, I have clients that are releasing equity by re-mortgaging the maximum amount of money from their residential property on interest rates as low as 3%, to then invest the money they have released in to properties that are yielding 18% - makes sense to me! Why leave surplus money in your property or even in a bank account, when the returns are much greater in investment property. However, I would always recommend a comfortable ‘rainy day’ pot.
WHAT POSITION DO I NEED TO BE IN TO RE-MORTGAGE
Most of the lenders will now only consider a re-mortgage for customers with clean credit history, so it is important to keep an eye on your credit file. If you are planning to re-mortgage try and avoid unnecessary footprints, as this does have an impact on the lenders credit scoring. Also, cancel off any existing credit facility relationships you no longer use e.g. credit cards.
When re-mortgaging a residential property, the amount you can lend is usually based on an income multiplier, which is usually somewhere between 3.5 and 4 times salary. Some lenders nowadays combine the use of an income multiplier and an internal credit scoring system to determine the amount they are prepared to lend.
If looking to re-mortgage a buy to let property, some lenders require a minimum income, but there are still lenders that don’t have a minimum income requirement. With several buy to let lenders it is uncommon for them to ask for proof of income for a buy to let mortgage, however they do reserve the right to request further information at any point from application to completion.
WHY CANT I RE-MORTGAGE TO ANOTHER LENDER AND WHAT CAN I DO
Unfortunately I am finding that the main reason why my customers are unable to re-mortgage is because they don’t have enough equity in the property. For example, in order to re-mortgage a buy to let property, there needs to be at least 20% equity. For residential mortgages, lenders are offering some fantastic products at 75% loan to value but for a higher loan to value than this the products don’t seem to be as attractive. There has to be a financial benefit for re-mortgaging, so I would suggest to speak to a broker before you do so they can take all the fees in to consideration and advise whether you should stick with your existing product or swap.
If you can’t re-mortgage to another lender, but you don’t like the idea of sitting on the lenders standard variable rate, speak to your lender, as I know some lenders will offer re-mortgage products to their existing clients, even if the overall loan exceeds their maximum loan to value (some will even go up to 100%).
If you are unable to re-mortgage but benefiting from a low standard variable rate or follow on lifetime tracker, it might be worth considering making overpayments to your existing lender. This may enable you to re-mortgage in the future, as you will be reducing the loan.
WHAT RE-MORTGAGE PRODUCT IS BEST FOR ME
This all depends on your attitude to risk. I will briefly summarise a selection of products:
Fixed Rate Product – at the outset the term and tie-in period is agreed. Throughout the tie-in period, the mortgage payment will not go up or down as the rate is set at a fixed rate. The benefit to this is if interest rates go up or the lender increases their standard variable rate, it will not effect the mortgage payment through the tie-in benefit period. However, if interest rates were to go down, as the rate is fixed the mortgage payment would remain the same.
Bank of England (BOE) Tracker Rate Product – is where the set rate is linked to Bank of England for a period of time agreed with the lender. The mortgage payment goes up and down in line with BOE rate movement.
Bank of England (BOE) Lifetime Tracker – is where the set rate is linked to Bank of England for the lifetime of the mortgage. The mortgage payment goes up and down in line with BOE rate movement.
Offset Mortgage – this is where a savings account can run alongside a mortgage and the amount in savings can be offset against the outstanding mortgage debt. If the original mortgage payment is maintained, this will reduce the term of the mortgage as in theory overpayments are being made. This type of product can also be available with access to a savings pot. For example, you may want to mortgage a property up to the maximum loan to value, but not take the maximum loan upfront. The surplus loan available can sit in a savings pot, and/or not be taken until such time the money is required, the benefit of this is interest is only being paid on the loan currently drawn down.
CAN I RELEASE MONEY WITHOUT RE-MORTGAGING
If you are looking to buy a further property and struggling to release surplus equity out of a property you already own to form a deposit, you could look at using a bridging company where they will place a charge against the existing property. In some cases this means that you don’t need to have any liquid cash when using a bridging facility, as the deposit normally required is secured against an existing property and the loan required to purchase a further property would be secured against that property. This would only really work if there were a reasonable amount of equity in the existing property.
Hope the above information is an insight to the re-mortgage market. Please contact me for further details.