If your home has gone up in value, it may be worth remortgaging.
Let’s take a look at why:
Get a better deal
When you remortgage, you switch to a new mortgage deal or lender because your current deal has ended. You can also take out a larger mortgage, clear your original balance and spend the extra money, on home improvements or a new car, for example.
So, how is remortgaging affected by rising house prices?
Well, an increase in property values can be good news if you’re thinking of remortgaging. This is because it often gives you a more favourable loan to value – and this is one of the points lenders use to determine how much you can borrow and what interest you’re charged.
What does loan to value mean?
Loan to value (LTV) is the ratio of the loan (mortgage) that’s outstanding on your home to its current market value.
Let’s say you bought your home for £200,000 and took out a repayment mortgage of £170,000. At the time of purchase, this would give you an LTV of around 85%
A few years down the line, you may have paid off a chunk of your mortgage. If there’s now £100,000 outstanding on your mortgage, your new LTV would be 50%.
The best deals on remortgages and secured loans tend to be available to people with an LTV of 60% or less – so an LTV of 50% is good news. But yours could actually be even lower than this.
How rising house prices help
The thing is, it’s unlikely that your home is still worth the exact same amount now that you paid for it. After a few years, even if you have done nothing to improve it, local factors can help to push up or sink property values in the area.
If the value of your home has gone up since you bought it, this can make your LTV more favourable. Let’s go back to our example.
Your outstanding mortgage balance is still £100,000, but the value of your property has increased to £250,000. You don’t owe any more, but if you were to sell the property, you’d get more back. In this example, your LTV is 40%.
Because this is quite a bit lower than 60%, you may be able to get a more competitive deal than you’re currently on. And if you can remortgage to a product with a lower interest rate but keep paying the same as you have been, you may be able to clear your mortgage sooner.
What if house prices have gone down?
If the value of your home has fallen rather than risen since you bought it, this will have the opposite effect on your LTV – and it’s usually not good news.
So, if your outstanding mortgage is 100,000, but in this case, the value of your home has dropped from £200,000 to £150,000, your LTV is 66%.
Now, this isn’t terrible by any means, but it does mean you’re unlikely to qualify for the best deals on the market if you’re thinking of remortgaging.
Should I remortgage?
"If you’re nowhere near the end of your current deal, you should think very carefully about remortgaging."
There are plenty of reasons to remortgage and your property’s value rising isn’t the only one. However, doing so could save you money in the long-term.
If you’re coming to the end of your current mortgage deal, now could be a great time to search the market and see what’s out there before you switch to your lender’s Standard Variable Rate.
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 quite steep.
Regardless of your LTV improving, paying this charge could wipe out any money you’ll save by switching, so it may be best to hold on until your deal comes to an end.
We hope you’ve found this blog helpful. Remember, the only person who can decide if remortgaging is a good idea is you – but the value of your home increasing could certainly inspire you to start thinking about it!
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