Should I remortgage if my home is losing value?
November 17, 2008 by admin
Filed under Remortgage Advice
If you’re coming to the end of your mortgage terms, you’re probably thinking about your next step. You have a choice: you can either stand back and start paying your mortgage lender’s SVR (Standard Variable Rate), or you can remortgage and attempt to find yourself a better deal.
However, with the current uncertainty in the mortgage market and a recession looming, remortgaging can be complicated. Lenders are currently being cautious about their lending - so even if you have a proven track record as a homeowner, you may find that mortgage deals are now more expensive, and harder to come by.
With the average house price falling by over 10% in the past year - and further falls predicted by numerous analysts - many homeowners are at risk of negative equity, in which more is owed on a mortgage than the house is worth. Most people who took out 100% and 125% mortgages are already in negative equity, as well as many people who only put down small deposits.
If you are in negative equity, you will be unable to take out a remortgage. For example, it would be too much of a risk to the lender to renew the terms on a £150,000 mortgage on a house that is now only worth £120,000. If you come to the end of your mortgage terms and you have negative equity, your mortgage will run its course and you will automatically start paying your lender’s SVR.
However, assuming you have some equity in your home, remortgaging could still be a good idea - providing it is for the right reasons.
Remortgage for equity withdrawal
One reason many people remortgage is to withdraw some of the equity in their home. Your equity is essentially the percentage of your home that you own - including your deposit, any repayments you have made, plus any natural increase in value over the years.
After you have withdrawn equity, you will either have to extend your mortgage period to cover it, or spread the amount you have borrowed across your existing monthly payments. Either way, equity withdrawal will increase the amount you owe on your mortgage - so if house prices continue to fall, your risk of falling into negative equity will become higher.
That said, if you have a great deal of equity in your home then you can probably withdraw some of the equity in your home without too much risk of negative equity.
Remortgage to lower interest rates / increase repayments
A common reason for remortgaging is to change to a mortgage deal with lower interest rates. If you’re on a fixed-rate mortgage, it’s not always possible to change to a cheaper deal (depending on market conditions) - but you can reasonably assume that you will be able to find a cheaper deal than your lender’s SVR, which you will normally pay if your fixed-rate terms have come to an end.
Paying lower interest rates in itself will not protect you from negative equity. However, if you decide to pay more towards the mortgage itself (i.e. not including interest) - perhaps by shortening the repayment period on your mortgage, or simply by making regular overpayments - your equity will increase more quickly, thus limiting the potential damage of a decrease in your home’s value.
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