When you’re looking to remortgage, here’s why its important to ask how much is my house worth?
There are two fundamental things that influence the rate you are offered on a remortgage these days:
- Your income
- The value of your property
Risk based approach to lending
Lenders will always take a risk based approach to lending. The two main levers when coming to pricing a remortgage loan is what % of the property are you lending (as that drives the chances of the lender losing money if they need to repossess the property, a harsh reality of the mortgage game.) And how affordable is the loan (what multiple of your income is being used to support the loan).
When looking at income, the above dynamic is true whether you are looking at remortgaging your home or a Buy To Let property. On the former, it will literally be your income (lenders are currently agreeing loans of around 4.5-5x your household income). On the latter, it will be the rental income on a monthly basis (see here for a comprehensive breakdown of what that means).
The property value
For the property value itself, that can be very tricky. Just how much is my house worth?
Arranging a remortgage isn’t something you do every day, so a good yardstick is Zoopla’s House Price index. This is often my first port of call if a client isn’t very confident on how much their property is worth come remortgage time.
If you bought recently, or are heavily invested in looking at house prices, you normally have a fairly good idea, but for many, it just isn’t a big deal or they aren’t sure.
Human nature is to inflate the value of your prized possessions, so if the Zoopla tool doesn’t work (and it can’t be all things to all people) a really useful guide is the Nationwide House Price Index tool. This works well as you simply project the value from when you purchased the property to today. Note of caution, this is based purely on this lenders experience and as such, can’t produce figures for the Chelsea & Westminster borough of London which speaks volumes of their client base. However, for the remaining 99% of the UK, it’s a pretty good yardstick (high value properties notwithstanding).
A real positive legacy of the COVID lockdown is how lenders have adapted to bring in tools such as the above, and their own data to remotely value a property. For a large majority of cases, most lenders rely on these tools and won’t send out a surveyor. This speeds up the process for all concerned and keeps down costs also.
Why is this all important with your remortgage?
As touched on above, how much is my house worth, can have a very big impact on the pricing of your remortgage. In a simple dynamic, every 5% deposit you have, decreases the rate on offer. So if you are looking to borrow £585k against an estimated value of £750k (78%), there could be a lower rate on offer if the value of the property could be confirmed at £780k which pushes the loan down to 75% of the property value.
The big variable is if you have conducted renovations/works to the property since it has been purchased, or you just got a steal of a deal. In that case the above calculators won’t give a fair picture, and this is where agents can come in handy. If you aren’t confident of the price, it may be a good idea to get a local agent in for a valuation to see what they think it will sell for. Depending on the agent, knock off 10% and you may be about right for a remortgage valuation. Lenders will often send our surveyors in this instance, so in all seriousness, we recommend you go to the highest realistic number you think you can achieve as they surveyor will simply downgrade the value if they feel you have got carried away.
Magic mortgage number
There is a magic number in mortgages which is borrowing 75% of the property value or less. The reason being, house prices have never gone down more than 25% in any one cycle, meaning if a lender takes on a loan at 75% of the property value (LTV – Loan To Value in mortgage parlance) there is zero risk the lender will have an asset that will enter negative equity and therefore realise a loss should they have to repossess.
The range at which lenders will take on remortgage loans varies, but some lenders go to 95% of the property value and once you borrow 60% or less of the property value, all lenders will offer a loan and at the best pricing available.
Comparison sites and aggregator sites often play this game where they say “mortgage rates from X%” but that will be from the 60% or less bracket. Its great clickbait to offer a rate sub 2% when in reality the pricing you will be offered is far higher. I often liken this to flight prices. You see ads like “return to New York for £99” but that only works if you fly on a Tuesday morning, during a full moon, your name is Bob and you actually land at LaGuardia. To fly into JKF, on a Friday, is considerably more expensive (admittedly, not the best time for that example but you get the point).
If house prices have dipped in your area and you were highly leveraged at the outset, you may find yourself above 95% or even 100% + of the property. If that is the case, you will be surprised at how flexible your existing lender is. The caveat being you have made all your payments to date. On this basis, some lenders go as high as 150% of the property value!
Consult a broker
The above all highlights that the relationship between “how much is my house worth”, i.e. your property value and your remortgage is extremely important. However, for the only truly independent view you must consult a broker. Brokers like us have access to deal from your lender plus the entire market and also have your interests at heart, so will be the only ones who can truly advise you on what is best for you, not the lenders share price!
Please contact one of our team to see what this means for you and we can have a far deeper conversation on what product suits you which is equally important as anything above!