When property prices rise, it can be good news if you’re thinking of remortgaging. The reason is that rising house prices often mean a more favourable loan to value ratio (LTV). Loan to value is one of the measures lenders use to work out how much you can borrow and what mortgage deals you’ll be eligible for.
What is loan to value and why is it important?
Loan to value (LTV) is the ratio of the loan (mortgage) that’s outstanding on your home compared to its current market value.
Let’s say you bought your home for £250,000 and took out a repayment mortgage of £200,000. At the time of purchase, this would mean you had an LTV of 80%.
After a few years have passed, you will have paid off a proportion of your mortgage. If there is now £180,000 outstanding on your mortgage, your new LTV would be 72%.
The reason that a lower LTV is good is that many of the best remortgage deals tend to be available to people with lower LTVs. However, in addition to paying down your loan, the fact that your home’s value has gone up could reduce your LTV even further.
The benefits of remortgaging when your house value has increased
House prices in a whole area or the entire country may rise over a period of years. However, properties in certain areas may see their values outpace the overall upward trend. If the value of your property has gone up it could benefit you when you come to remortgage.
Let’s go back to the example above. Although your outstanding mortgage balance is still £180,000, imagine that after a recent valuation, you find out that the value of your property has increased - from £250,000 to £300,000. You don’t owe any more money on the mortgage, but if you were to sell the house right now, you’d get more money for it than before.
Due to the rise in value of your home, you would find yourself with an even more favourable LTV than you thought. In this example, your LTV is now 60%, instead of 72%.
And, due to your lower LTV, you may be able to get a more competitive mortgage deal than the one you’re currently on. In this instance, if you can remortgage to a product with a lower interest rate but keep paying the same monthly amount as you have been, you may be able to clear your mortgage sooner.
Should you always consider remortgaging when your house value has increased?
In many cases, it can make sense to remortgage if the value of your house has gone up. However, if you’re nowhere near the end of your current deal, you should think very carefully about remortgaging. There’s often an Early Repayment Charge to pay when you switch early, and this can be a large amount of money.
However, if you’re coming to the end of your current mortgage deal, it could be a good time to search the market and see what’s out there before you switch to your lender’s standard variable rate. At L&C we can advise you about the best remortgage deals on the market and help you take maximum advantage of your lower LTV.
Taking out equity when remortgaging
Another reason to remortgage is to release some of the equity in your home. When you do this, you’re essentially borrowing more against your property in order to free up cash.
If you’re looking for access to funds, taking out equity when you remortgage can be a good idea. You can use that money to renovate your home or even pay off things like credit card debt. The fact that you have a lower LTV may mean you can get a better deal. At L&C we can advise you on the best ways to take out equity, should you choose to do so.
You could also release money to put down as a deposit if you want to buy another property, either as a second home or to rent out. However, it’s important to make sure you can afford the payments on a second property as well as your primary one.
Key things to know about remortgaging when house prices fall
If your current mortgage deal is coming to an end and you need to remortgage, seeing your property reduce in value can be disconcerting, especially if you only have a limited amount of equity in your home.
Here, we look at whether it's a good time to remortgage, how falling house prices could affect the amount you can borrow, and any considerations to keep in mind.
Can falling house prices stop you remortgaging?
Falling house prices aren’t a reason not to remortgage. If you roll onto your lender’s standard variable rate when your current mortgage deal ends, this is likely to be more expensive than the rates you could get if you remortgage.
Fixed remortgage rates have been reducing recently too, which could mean that you’re in a better position to remortgage now than you might have been a couple of months ago.
It’s also worth noting that property prices have only fallen slightly, so if you’ve been in your home now for a few years, its’s likely that the value of your home has increased over that period, which should mean you still have a good amount of equity in it. You may also have paid a decent chunk off your existing mortgage over this period, which may have reduced your loan to value (LTV) meaning you can access better mortgage deals.
For example, when you first took out your mortgage, you might have paid a 20% deposit and borrowed 80% of the property value. If property prices have risen since you bought, or you’ve paid off some of your mortgage, it might now be equivalent to 75% or even 60% of the house price. This means you now effectively have as much as 40% equity in the property and could get better terms when you remortgage.
Can you remortgage if your house price has fallen?
You can start looking for a new mortgage deal up to six months before your current deal finishes – and our rate check service lets you check interest rates again before you complete on your remortgage.
Your LTV will determine which mortgage rates you have access to, so if you’re on the edge of a particular bracket and prices continue to fall, this could push you into a higher LTV. If you’re worried about falling into a higher LTV bracket due to slowing property prices, and you’ve got a while to go before you need to remortgage, you might want to consider overpaying your mortgage.
Even overpaying by a small amount can have a significant effect on your mortgage balance over time. For example, someone with a £150,000 repayment mortgage with 20 years remaining at a 4.5% mortgage rate would pay £6,767 less in interest and reduce their mortgage term by one year and seven months if they made £50 monthly overpayments.
Most lenders will allow you to overpay up to 10% of your mortgage each year without an Early Repayment Charge but always check the terms of your specific deal as sometimes this can vary.
How much can you borrow if your house is worth less?
There are several different criteria lenders will look at when deciding how much to lend you when you remortgage. The two main things they will want to establish are that you’ll be able to comfortably afford your mortgage payments both now and if interest rates continue to rise, and that you won’t miss any repayments. The higher your outgoings are, the lower the remortgage amount you’re likely to be offered, so it’s worth looking at ways you might be able to reduce these before submitting your remortgage application. You can use our remortgage calculator to get an idea of how much you can borrow.
When assessing how much to lend you, lenders will also want to know more about your property and will carry out a remortgage valuation to see whether it’s worth what you think it is. If the surveyor thinks the property is over-valued or its price has fallen, you may be able to borrow less than you’d hoped. Our house price calculator can give you an idea of how much your house is currently worth and how much its value has changed over the past year.
