If you’re a homeowner, you may have noticed that the value of your property has increased over the years. This could be due to a variety of factors, such as improvements to the property or a rise in demand for homes in your area.
Whatever the reason, a rise in property value can be an opportunity for homeowners to consider remortgaging.
Remortgaging involves switching from your current mortgage deal to a new one, often with a different lender. In this article, we’ll explore the benefits of remortgaging when your house value has increased, as well as some potential drawbacks to consider.
If the value of my property has increased, would it be advisable to consider remortgaging?
The most suitable person to seek advice from on valuing your property would be an estate agent or surveyor who has a good understanding of the property market. While an online valuation tool can provide an estimate, a professional valuation is more precise.
When the value of your property increases, you can potentially access more equity to utilise in a remortgage. This is because your loan value remains the same, but your property value has increased, resulting in a higher loan-to-value (LTV) ratio.
However, it is essential to be realistic in your valuation and calculations to avoid a scenario where a lender disputes the property value, leading to a reduction in the residential mortgage or buy to let mortgage amount.
What is the process to determine if my property’s value has gone up?
To begin exploring remortgage options, it’s essential to have an accurate understanding of your property’s current market value.
This will enable you to determine your loan-to-value (LTV) ratio, a key factor in remortgaging after a rise in property value. Obtaining a property valuation and calculating your LTV are the two critical steps in this process.
Get a precise property valuation
Valuing a house is an important process that can help you determine the market price of a property. The value of a house depends on several factors, including its location, size, condition, and amenities.
In order to do so, research the local property market, assess the condition of the property, consider the size and layout of the property, look for unique features and amenities or consult with a professional.
Determine the Loan to Value ratio
To work out your loan to value, simply divide your mortgage value by the market value of your house. Multiply this number by 100, and you’ll have your loan to value percentage.
In real life example example
For instance, if you have a balance of £600,000 on your current mortgage statement yet there is a balance of £900,000 on your house, 600,000 divided by 900,000 equals 0.66.
This would mean the current LTV = 67%
If you want to work out the loan to value for a house yourself you can do this simply by visiting an LTV calculator like this one.
How can you make the most of your heightened home equity?
If the equity value of your property has significantly increased, you can leverage this by taking out a new mortgage through either remortgaging to another lender or adding onto your existing mortgage with your current provider.
This allows you to access the extra cash for various purposes, such as consolidating debts, purchasing a new car, or carrying out home improvements to further boost your property value.
It’s essential to be mindful of market-based forced appreciation to prevent overvaluing your property, which could lead to issues if the value of the surrounding area is much lower.
Lenders typically require you to retain 10-20% of equity in the property when raising capital, and the amount you can borrow is dependent on the current value of the property and the purpose of the loan.
Borrowing against the increased value of your property through a mortgage comes with lower interest rates than personal loans or credit cards, making it an attractive option for settling significant expenses.
However, it’s crucial to consider the overall costs and benefits of taking on debt over a longer period. Additionally, leveraging the increased equity in your home can also allow you to purchase another property.
What is meant by the term “home equity”?
Home equity means the amount of your home that you own compared to what is owned by the bank for instance.
Remortgaging or raising capital, which should you do?
Whether you remortgage or raise capital is up to whether you would like cash up front or if you prefer just getting rid of the debt on your property altogether.
For example, if you were able to remortgage you’d end up pulling some equity out of your house whereas if you just want to raise capital, you’d be able to pay off your mortgage that bit sooner and pay off the loan in 8 years instead of 15 for instance.
Should you sell your property to capitalise on the gains or upgrade to a larger home?
If your home has experienced a significant increase in value, why not consider selling the property and cashing in on the equity?
Depending on your individual and family situation, downsizing to a smaller property can save you some money and provide the opportunity to enjoy some luxuries with the leftover capital.
Alternatively, you could use the extra equity to put down a substantial lump sum towards an even larger dream home.
Having equity in your home is an exciting opportunity that offers numerous options, and it’s crucial to leverage it to your best advantage to “future-proof” your next housing move.
Is it advisable to use a mortgage broker for remortgaging?
It’s important to see a mortgage broker at the start of your mortgage journey whether it’s your first mortgage or you’re looking to re-mortgage. It will save you a lot of time and effort in the long run.
It’s a good idea to speak to a few different firms to see what’s on offer and to compare fees.
There are two main types of mortgage professionals who will be able to help.
Mortgage advisers connected directly to banks and lenders usually only recommend debt from that specific lender.
Mortgage brokers, or independent financial advisers, who can look at a range of mortgages from different lenders. Some of these mortgage brokers might even consider the whole market offering you an extremely large range of mortgage products.
Opting for a broker or adviser that offers a “whole of market” service is the logical choice, as they have access to the widest range of lenders and mortgages.
Nevertheless, it’s important to note that even with “whole of market” advisers, some lenders and mortgage options may still be omitted.
In certain cases, it may be advantageous to approach the lender directly for your mortgage, as they may offer exclusive deals that are not accessible through brokers, helping you avoid any upfront broker fees.
There are some pros and cons that can help you evaluate the idea of having a mortgage broker by your side to make the decision
Access to a wider range of options
A mortgage broker would perhaps be able to find lenders that are off the market and able to find a specific deal or loan that no other bank or lender you can find on the open market is offering.
This is because of the many connections a mortgage broker is able to build up.
There are quicker processing times when dealing with a mortgage broker as they may be able to forward an application or put in a good word so you can close a deal a bit quicker
Finally, and the most important reason is because you want to be able to take advantage of the expertise of a buyer. It could be that they advise to go with a lower interest rate mortgage or use a mortgage guarantor.
Amongst the advantages, there are also disadvantages to the process of having a mortgage broker on board when remortgaging a property.
As you know, when a property is being remortgaged, it is to cut costs and make a saving on your mortgage payment. However, if there is a large mortgage fee involved to take on a mortgage broker, this could defeat the point.
To reduce costs, you could perhaps just ask for the advice of a mortgage broker rather than asking them to complete the entire process for you or you could negotiate a good deal
In general, the process of remortgaging is extremely difficult and it could be the case that if the value of a house goes up then it is a good idea to remortgage.
However, each case should be considered individually as there are cases where it still doesn’t make sense because of higher interest rates. No matter how much a house has appreciated in value