Can I remortgage if I’m struggling financially?

Remortgaging can be a great way to reduce your monthly outgoings, and you may be able to take advantage of today’s rock-bottom mortgage rates even if you’ve suffered a financial hit due to coronavirus.

UK mortgage rates have fallen to  historical lows, following the Bank of England’s decision to cut the base rate to 0.1% on 19 March. According to financial analyst Moneyfacts, the average two-year fixed-rate mortgage currently stands at just 2.09%, while the average five-year fixed-rate is 2.35%. These are the lowest fixed rates seen since Moneyfacts’ electronic records began in July 2007. However, the number of mortgage options available has fallen dramatically in recent weeks, as physical property valuations have been unable to take place. Since the property market re-opened for business last week, lenders have gradually started to reintroduce some of the deals they withdrew when lockdown started, and hopefully this will continue in the days and weeks to come.

Whether you will be accepted for a remortgage deal is dependent on several factors, with the criteria you’ll need to meet varying from lender to lender.

Here, we look at some of the things you might need to consider when remortgaging, and how a reduced income might affect your chances of having your mortgage application accepted.

Can I still remortgage if I’ve been furloughed?

You can still secure a mortgage if you’ve been furloughed,  although most lenders will only base a mortgage offer on your current income.  This means that if you’re on a reduced regular salary, this may limit the amount you are able to borrow.

Under the furlough scheme, the government will pay up to 80% of your salary, up to a maximum of £2,500 per month. So if you earn £50,000 a year, for example, the government will fund a maximum of £30,000 per year. However, some employers have chosen to top up the government’s grant up to 100% of income. If your employer is topping up your furloughed income, lenders may also take this into account. .

If your income has fallen substantially, then the amount a lender will be willing to lend you will also fall. So depending on how much you want to borrow, you may find it more difficult to remortgage to a new deal unless you can provide evidence that any drop in your earnings is only temporary.

Frustrating as it may be, bear in mind that if you’ve been furloughed, or your income has changed since you started a mortgage application, it is your duty to disclose this to the lender, even after you have an offer.

How much can I borrow?

As a general rule, when you take out a mortgage or remortgage, lenders will usually allow you to borrow up to four, or four and a half times your income if the mortgage is in your name only. If you’re buying or remortgaging with someone else, they’ll typically allow you to borrow up to three times your joint income. These rules of thumb can be a helpful guide, but remember that lenders will want to look at your detailed income and expenditure before they can make an accurate assessment of how much they are willing to lend. Mortgage broker London & Country mortgages has a useful mortgage borrowing calculator to help you work out how much you might be able to borrow.

In addition to the lender’s assessment of mortgage affordability based on your income, they will also factor in how much you want to borrow in relation to the value of your property – usually called the ‘loan-to-value’ or LTV, and expressed as a percentage. For example if you wanted to borrow £100,000 against a property that is valued at £200,000 then this equates to a LTV of 50%.

As a result of the general uncertainty surrounding coronavirus, lenders have typically reduced the percentage of a property’s value that you can borrow, as they are unable to accurately assess the value of the properties they are lending against.

This means that if you need to remortgage more than 80% of the value of your home, then   you may find it trickier than usual to remortgage, or have fewer deals available to choose from.  With physical property valuations gradually restarting over the coming weeks, more lenders may be willing to lend at higher LTVs given time.

I’m on a mortgage payment holiday. Will this affect my chances of being accepted?

In theory, it shouldn’t. The city regulator the Financial Conduct Authority (FCA) has said that taking a payment holiday due to the impact of coronavirus will not impact on your credit rating.

However, lenders are free to determine their own risk criteria and base their decisions on more than just your credit score. So if you take a payment break, this may limit your options, as lenders may be concerned that you’ve run into financial difficulties. You should still be able to switch to a new deal offered by your existing lender, but there is a risk that a mortgage payment holiday could make your application less likely to be accepted with a new lender. Ultimately, a lender will need to see  that any new mortgage will be affordable, so  if they’re confident that you can comfortably cover the cost of your mortgage payments, you’re more likely to  be able to remortgage with a new or existing provider.

What if I’ve got a poor credit score?

Depending on your situation, it’s possible to secure a mortgage with a bad credit score. However, you’re likely to pay a high interest rate, and you may need more equity in your home.

Your credit score is essentially a record of your financial history, including any missed payments and any applications for credit you have made. Lenders use this to decide how much of a risk there is that you won’t be able to pay them back and will default on your mortgage.

If you are worried about your credit score, then there are three main credit reference agencies which offer you access to your credit report: Experian, Equifax and TransUnion (formerly Callcredit). It’s worth checking your report for any errors before submitting a mortgage application, as you can add a note to your credit file or have an incorrect record removed if necessary. Experian has a free service that enables you to sign up and check your credit score with them. ClearScore  is another free credit checking service that accesses Equifax data and Totally Money offers a similar service using data from TransUnion.

If your credit score is lower than you’d like, you may want to try improving it before applying for a mortgage. You can do this  by making sure you don’t miss any repayments on your loans, credit cards and mobile phone and other bills and cancelling any credit card accounts which you no longer use.

The best course of action is to speak to a mortgage broker to see what your options are if your current deal is coming to an end, or if you’re keen to cut repayments, as they will know which lenders tend to be more sympathetic for applicants with less than perfect credit scores.

What should I consider when choosing a remortgage deal?

Bear in mind that your current lender may not offer existing customers the best rates, so always check what’s on offer across the market so you can be certain that you’ve found the best possible deal. This is particularly important if you have little equity in your property, or you’re struggling financially.

Alongside the headline interest rate, always make sure to factor in any additional costs. There are plenty to consider, including arrangement fees, valuation fees, and legal fees, which can add up to thousands of pounds. The lowest rates may come with hefty fees, so depending on the size of your mortgage this can make them more expensive over time. Make sure you consider the total cost of the mortgage, including all charges, rather than basing any decision on the headline rate alone. Some deals may offer incentives such as free valuations, but consider if these will save you enough money compared to others over the term of the deal.

Beware that if you move lenders while you’re still tied to a deal you could face substantial Early Repayment Charges (ERCs) of between 1% and 5% of the mortgage. Any ERC should appear on your annual mortgage statement, your original mortgage offer or you can call your lender to find out the details. If there is an Early Repayment Charge in place, you’ll need to weigh up the costs of the penalty charge against the savings you’ll make from remortgaging before your current deal ends. Again, a good fee free mortgage broker can help with this.

How long will it take to remortgage?

The remortgage process typically takes between four and eight weeks, so it’s usually best to start your search at least three months before your current deal expires to avoid going onto your lender’s expensive standard variable rate.  It is possible to lock in a new mortgage deal between three and six months before you want it to begin, so this gives you plenty of time to plan ahead and take advantage of a good deal.

However, the disruption caused by coronavirus means it is taking longer than usual to secure a mortgage so you might want to start looking even earlier than usual. Lenders are currently under a huge amount of pressure  as they have so many payment holidays to process, so you may need to be patient, particularly if you are making changes to the amount you want to borrow, or your mortgage term, as this may require additional checks. Doing a straightforward ‘product transfer’, by switching to a new deal with your existing lender, is likely to be the quickest and easiest way to secure a better deal – but bear in mind that it is unlikely to be the best deal out there.

If you’re not sure which remortgage deals you’ll be eligible for, fee-free mortgage brokers such as Fluent Mortgages or London & Country Mortgages can research the various options that may be available to you on your behalf. They’ll also be able to advise which deals may be best for you based on your individual circumstances.

Have you remortgaged and saved money recently or are you planning to do so in the next few months? If so, we’d be interested in hearing from you. We’re also really interested in hearing from people who are on their lenders standard variable rate and who may have been put off from remortgaging for one reason or another. You can drop us an email at [email protected] or leave a comment below.

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