Correct at 31/12/2023
When property prices rise, many mortgage holders wonder what their next move should be. One of the options is to remortgage their property, which can open up a number of benefits, including switching to a better deal and releasing some equity. In this article, we’ll explain everything you need to know about remortgaging when your house value has increased.
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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.
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.
A good starting point is to use our house price calculator, which will give you an initial idea of what your home could be worth. You can also use the online property portals and have a look at what similar properties in your area are being sold for.
It’s worth keeping in mind that any new lender will want to carry out their own valuation before offering you a new mortgage, so it’s important not to over-estimate what you think your property is worth. At L&C, we can advise you on how to find the best remortgage rates, no matter whether you’re looking to take out equity or simply want to get the best mortgage deal for you.
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