Regularly reviewing your mortgage can save you hundreds or even thousands of pounds. However, some people might find it difficult or even impossible to remortgage. Read on to find out why you might be struggling to remortgage, what you should do to improve your chances and how new rules might help you if you’re stuck with your current mortgage.
Why should you remortgage?
There are many reasons to review your mortgage and potentially remortgage. But all of them are about making sure you’re on the best deal.
New mortgages normally start you on a fixed or discounted rate deal for an agreed number of years or period of time, sometimes called the initial term. When this deal ends, your repayments might go up.
Interest rates can go up and down, which can affect the cost of your mortgage and cheaper products can come onto the market.
Why can I not remortgage?
There are a number of reasons why you might struggle to remortgage, but most of these come down to you failing the stricter affordability checks brought in since the financial crisis.
Often referred to as “mortgage prisoners”, these people can be stuck on higher interest mortgages, or their lenders standard variable rate despite being up-to-date with their mortgage payments and not looking at increasing their borrowing.
New rules introduced by the Financial Conduct Authority (FCA) might mean it is now easier for some people stuck on more expensive mortgages to switch.
However, if you’re going to benefit from the new rules, it’s important to understand not all lenders will offer this, and you will still need to meet certain eligibility criteria to remortgage.
Low credit rating
If you have a low credit score, you are less likely to be able remortgage. Even if you can remortgage, you are less likely to get a good deal and will often face higher interest charges.
Building a good credit score, or credit rating, is not a quick process, but there are a lot of things you can do.
If you don’t know your credit score, the first thing to do is check it with one of the three main credit rating agencies.
There are then a number of things you can do to improve it including checking for errors, getting a credit-building credit card and avoiding or paying off high cost credit.
High loan to value
The value of your property can go down, as well as up. This means when you come to switch your mortgage you could be assessed on a higher loan to value (LTV), which reduces you chances of successfully remortgaging.
The loan to value is the amount you borrowed (or in the case of remortgaging, the amount outstanding) compared to the value of the property. For example, if you borrowed £160,000 to buy a £200,000 home, your LTV would be 80%.
However, if your home had gone down in value to £175,000, but there was still £150,000 outstanding on the mortgage, your LTV is more than 85%.
This is particularly a problem for people who were able to take out 100% or 120% mortgage before the credit crisis.
Being in negative equity will also cause problems when it comes to remortgaging. This is where the amount outstanding on your mortgage is more than value of the property.
Drop in income
If your personal or household income has dropped since you took out your mortgage, for example if you’ve changed jobs, been forced to reduce your hours or split up with your partner, you might struggle to remortgage.
Income does not technically make up part of your credit score. But a drop in income could mean you fail the affordability assessment.
Missed payment and mortgage arrears
If you’re currently in arrears on your mortgage, or have missed mortgage payments in the last 12 months, even if you’re no longer in arrears, you are going to struggle to remortgage, even under the new FCA rules.
What the new FCA rules mean for you
New rules from the Financial Conduct Authority (FCA) aim to help you if you’re currently making your mortgage repayments but are stuck on expensive mortgages with your existing lender because you have difficulty passing another lenders affordability checks.
Lenders can choose to, but don’t have to, offer what’s called a “modified affordability assessment”. This allows lenders to choose not to apply certain affordability assessment rules. This might include not having to verify your income, consider your future changes in circumstances or apply the interest rate stress test subject to certain conditions.
To use the “modified affordability assessment”, lenders must show the new mortgage is at least more affordable than your present one, tell you how your affordability has been assessed and tell you about any potential risks.
Mortgage lenders can carry out a modified affordability assessment if you:
- have a current mortgage
- are up to date with mortgage payments
- have not missed a mortgage payment in the last 12 months
- do not have any unpaid fees or charges
- do not want to borrow more money (excluding fees associated with remortgaging)
- are looking to switch to a new mortgage deal on your current property.
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