Why should you remortgage when the value of your home has increased?

If you wait to remortgage your home once it has increased in value, you will have more opportunities to get a better deal on your mortgage or borrow additional funds. 

This is because you will own more equity in your property and be able to access lower interest rates.

What is remortgaging?

Remortgaging involves changing your existing mortgage to a new one, typically with a different lender.

The idea behind remortgaging is to potentially take advantage of lower interest rates or release equity for other purposes.

In recent years, remortgaging has become more attractive due to soaring interest rates and an increase in the average house price in the UK.

The most common time to remortgage is when a fixed or discounted mortgage deal has come to an end and you will be switched onto the lender’s standard variable mortgage rate, increasing monthly mortgage payments.

If you remortgaged before a fixed-rate period had ended, you would likely need to pay a fee to exit your current mortgage.

What is equity?

In homeownership, equity refers to the portion of the property you own outright.

To work out how much equity you have in your home you simply need to subtract your outstanding mortgage balance from your home’s current market value.

So, if you have a £200,000 mortgage on a property worth £300,000, you have £100,000 equity.

What is meant by the loan-to-value (LTV) ratio?

The LTV ratio is a metric that indicates what percentage of the property's value or purchase price is funded by a mortgage.

You can calculate your home's LTV ratio using this formula:

Lenders use the LTV ratio to determine the risk associated with a mortgage. For example, a lower LTV, like 60%, is considered lower risk for the lender, because the borrower has 40% equity in the property.

On the other hand, a higher LTV ratio - such as 90% or 95% - is higher risk for lenders, as the owner only has 10% or 5% equity in their home. 

Why should I remortgage when the value of my home has increased?

If the value of your home increases substantially, you can remortgage it as a strategic financial move.

Here are some reasons why homeowners remortgage their homes:

• Improved LTV ratio: An increased property value lowers the LTV ratio, as the outstanding mortgage amount remains constant while the value of your property rises.

• Increased equity: A higher property value increases equity. Homeowners can also leverage this equity via remortgaging to access funds for various means, such as home improvements.

• Lower interest rates: An improved LTV ratio before remortgaging may allow you to access lower interest rates.

• Lower monthly payments: Lower interest rates or different mortgage terms from remortgaging may reduce your monthly repayments.

• Financial flexibility: Having access to equity in your home provides more financial flexibility, such as reinvesting in your home or pursuing investment opportunities. However, you should consider whether it’s worth accessing money through other means instead of accessing equity in your property, as your LTV will rise.

• Potential for shorter terms: If you're in a favourable financial position, you could switch to a shorter mortgage term. Doing this will allow you to repay your loan faster and save on interest, but your monthly payments could rise.

What are the advantages of remortgaging?

Below are some of the most significant advantages of remortgaging your home if its value increases:

1. Lower interest rates: Remortgaging may allow you to get a better mortgage with lower interest rates, especially if market conditions or your creditworthiness have improved since your initial mortgage.

2. Access to equity: When your home's value increases, remortgaging allows you to tap into accumulated equity you can use for other financial goals.

3. Debt consolidation: Remortgaging allows you to access money to consolidate high-interest debts, but you should consider alternative ways to clear debt and get financial advice first. By accessing equity in your property, your LTV may rise, and, potentially, your monthly payments.

What are the disadvantages of remortgaging?

While remortgaging has its advantages, it has its cons as well.

Here are three key disadvantages to consider:

1. Costs and fees: Remortgaging involves various fees. These may include arrangement, legal and valuation fees, as well as potential early repayment charges from your lender. These upfront costs can offset potential savings and are often added to the loan amount, so it's vital to consider if remortgaging is right for you.

2. Increasing debt: If you remortgage to raise funds you will be increasing your borrowing and potentially face higher repayments. This will put you at greater risk if you struggle to make mortgage repayments at any point in the future.

3. Extended loan term: If you remortgage your home to lower your monthly payments, you might opt for a longer loan term. Doing this can provide monthly relief in the short term, but you'll pay more interest in the long term.

Here's a quick summary of the main pros and cons of remortgaging:

Seek expert financial advice

Remortgaging your home when it has increased in value makes good financial sense, as you can lower your LTV ratio or release equity from your property by adding additional borrowing to your loan. 

However, assessing the feasibility of remortgaging your home can be tricky, so it's strongly advised that you find a mortgage broker who can offer you expert financial advice.

A mortgage broker can outline the pros and cons of remortgaging your home and also find the best rates for you that may not be available on the open market.