Updated 03 December 2020
A growing number of homeowners are turning to remortgaging to release funds to improve their homes and raise their value. Meanwhile some lenders are seeing remortgagers as a safer prospect than new buyers, resulting in better deals becoming available. Article by Nick Green.
Being locked down at home has given millions more Brits a chance to notice the peeling paintwork, the dodgy guttering, how poky the lounge is and how the attic might make a nice ensuite. A survey by NatWest has found that while home improvements are traditionally the reason for one in every five remortgage applications, three times as many homeowners (62%) would now consider remortgaging for this purpose.
There are no prizes for guessing what lies behind this shift in behaviour. Lockdown has increased the amount of time that homeowners must spend in their houses or flat, while simultaneously making the property market more uncertain. Over a third (36%) of respondents in the NatWest survey say they expect to be staying at home more often in years to come, and among younger homeowners the figure is 45%. Meanwhile, of those who were planning to move home before the pandemic hit, 38% have cancelled their plans and 47% have put plans on hold.
This double whammy has prompted more people to focus on making the most of their current home, as an alternative to moving up the property ladder. Now 6 in 10 homeowners are at least considering ‘remortgaging to renovate’, a figure that rises to nearly 8 out of 10 homeowners aged 30 or under. There is also a strong consensus (74%) among those who have remortgaged that it is a good alternative for people who are struggling to sell in the current climate.
The NatWest study found that the biggest reason for remortgaging was simply to ‘reduce monthly payments’, with 43% citing this reason (graphics: NatWest):
Mainly this is due to homeowners’ original mortgage deals expiring, reverting their interest rates to the lender’s standard variable rate (SVR), typically much more expensive. Home improvements are the second most popular reason for remortgaging, but are likely to see the biggest growth in popularity as people stay in their current homes for longer than planned. Renovations and extensions are also a good way to ‘climb the property ladder’ without moving home, since a three-bedroom home could be upgraded to a four- or even five-bedroom, or otherwise expanded, to raise the eventual sale price. If the money for the building work is raised by remortgaging to release equity, then the eventual net cost to the homeowner may be low, zero or even negative, depending on how much value is added to the property as a result. In the right circumstance, it can therefore be a shrewd strategy for using a mortgage to improve one’s overall financial position.
This is key, because a third significant reason given for remortgaging is ‘to relieve financial anxiety’. This could be related to the fear of reverting to an expensive (and unpredictable) SVR mortgage, or may be a sign that some are remortgaging in order to have more money to spend now. The NatWest findings show how remortgaging has affected people both in terms of financial health and mental health:
Over 70% said remortgaging had given them either more flexibility or more disposable cash to spend, while nearly half (43%) said remortgaging had improved their mental wellbeing. As an aside, it is worth noting that the mortgage payment holidays provided by the government are set to end on 31 October, which may prompt a surge in remortgage applications as people seek cheaper deals.
Many lenders have grown more cautious due to the pandemic. One of the nation’s most popular mortgage deals – the two-year fixed rate from Halifax – has been withdrawn. In its place is a range of new three-year deals, which offer similarly competitive rates but may come with more stringent requirements for borrowers. In other words, these deals may be harder to secure.
But this isn’t just about banks battening down the hatches. Halifax’s motivation seems to be that it wants to hang on to its ‘safest’ customers for longer. The new three-year remortgage deals are aimed at those with very low loan-to-value ratios, i.e. those with a lot of equity. Customers with 60% or better LTV can get a 1.17% rate fixed for three years, which is better than Halifax’s two-year fixes for first-time buyers or home movers. This is another factor that might encourage homeowners to remortgage rather than move – as lower-risk customers, they can secure better mortgage deals.
However, according to LMS, the conveyancing services provider, remortgaging deals fell by nearly a third in August. This was due to the stamp duty holiday, which spurred people into going ahead with their house purchases when otherwise they might have been deterred by the pandemic. Of those who did remortgage successfully, around half managed to get a new deal paying an average £200 less per month, while 42% increased the size of their loan – and many of these are likely to be freeing up capital to fund home improvements.
LMS’s CEO Nick Chadbourne said, ‘Lenders continue to offer attractively priced fixed-rate packages as they pass their lower borrowing costs onto customers. This will come as a welcome relief to borrowers looking to remortgage to reduce outgoings as the economic uncertainty caused by Covid-19 continues, and the end of many government support schemes come into sight.’
Remortgaging to renovate isn’t always the right move, but in the very best scenarios it can almost be a way to get ‘something for nothing’: by releasing capital from your home to boost your home’s resale value by more than it costs you – and all without increasing your monthly mortgage repayments.
If your property’s value has increased since you bought it, then (all else being equal) you can usually remortgage for a higher sum without increasing your monthly payments. If your home hasn’t increased significantly, however, remortgaging may not be cost effective.
Most mortgage deals have a tie-in period, often longer than the deal period itself. For example, a two-year fixed rate mortgage might charge you an early repayment charge (ERC) if you try to remortgage within three years. This fee might set you back a few thousand pounds, so factor this into your sums.
Taking out any mortgage can involve an arrangement fee, a valuation fee and a booking fee, on top of any early repayment penalty. Of these, the arrangement fee is potentially the biggest, though some mortgage deals have none.
Your current lender will want to retain you as a customer, but there is nothing to stop you shopping around. A mortgage broker has access to a far wider range of deals, some of which aren’t available on the high street, and if your equity has risen then you may be eligible for better offers than you think.
Remortgaging to release capital means you’re borrowing more money, so you’ll end up repaying more and it’ll take longer to pay back the loan. You’ll also be increasing your LTV ratio, which means that if property prices fall you could find yourself in negative equity. At times of economic uncertainty, you may feel more comfortable having an ‘equity cushion’ to fall back on.
Extensions are expensive, so look for those that will boost your house price by more than their cost. An extra bedroom is always a winner, with an ensuite being most highly prized. A big open-plan kitchen-diner or an extra bathroom are also good choices, but extra / larger reception rooms are less profitable. Building upwards (e.g. loft conversions) or using existing space (e.g. garage conversions) are also better than reducing your garden space. Find out which improvements can add the most value. Our tips for renovation and property developing and on home extensions may be useful too.
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