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Things to Know about Remortgaging in Britain
2022-03-17

    In the process of real estate investment and management, there are four most common situations where remortgaging is applied.

  1. Transfer of owner-occupationreal estate torental one: if you want to rent out the real estate you used to live in, you need to consider using remortgaging to convert owner-occupation mortgage into buy-to-let one before actual implementation.
  2. Transfer of cash payment or short-term mortgageto long-term mortgage: investors who originally used full cash to pay would like toapply for remortgaging to withdraw part of their funds. Although this is the first time a buyer applies for a loan, it is counted as remortgaging. In some other cases, buyers who originally used a short-term mortgage would like to apply for turning to a long-term one by remortgaging, because the interest rate of short-term loans is usually higher than that of long-term loan.
  3. Rearrangementof mortgageafter the existing mortgage with fixed interest rate expires: for example, some 2-year, 3-year or 5-year fixed interest rate loan schemes have a limited period of fixed interest rate. After the period, the interest will return to 4.99% or even more than 5%. At this time, you can apply for a new mortgage with a fixed interest rate of 2 or 3 years. Repay the old mortgage with the new one, and then continue to repay the new mortgage with relatively lower interest rate.
  4. Real estate appreciation releases a lagerloanamount: whether it is the appreciation of the real estate due to the additional transformation after you buy the real estate, or the appreciation of the real estate due to the favorable market, at this time, thanks to the increase of the value of the real estate, you can borrow more money than the original amount through remortgaging. For example, if your house was worth 100,000 pounds, the minimum down payment is 25%. Then you pay 25,000 down and 75,000 loan to buy the house. After that in a few years, your house is worth 150,000 pounds, you can apply for remortgaging for 75% of the house value. Well, since the house is valued 150,000 pounds at this time, 75% of the value is 112,500 pounds. After paying off the previous 75,000 pounds, there will be an extra 37,500 pounds on hand, which can be used for other investments. Moreover, since the sum of 37,500 pounds is a loan rather than a profit, it is tax-free.

Steps of applying for your remortgaging

    Whether your buy a property for owner-occupation or buy to let, the need for remortgaging will involve the next steps:

  Step 1: you need to find a new bank or credit institution to reach an agreement on the new loan.

  Step 2: you need to hire a lawyer to handle relevant legal affairs and transfer procedures on your behalf.

  Step 3: just like applying for a loan for the first time, the lender of remortgaging will evaluate your property, including checking the rental agreement (if any), checking whether the property complies with relevant laws and regulations, etc.

  Step 4: after the loan application is approved, the lender will transfer the approved amount to your designated representative lawyer's account. After receiving the money, the lawyer will pay off the previous loan first, and the rest will be transferred to your account.

    After knowing the application steps of remortgaging, you’d better learn some detailed methods and tips in each common situation.

  1.  Remortgaging for letting your property

M   any people think they don’t live in their own house and they can naturally rent it out, because the property right of the house is theirs. But it is illegal. Renting the self-occupied property without notifying the lender to rearrange the mortgage may violate the terms of the mortgage agreement. The interest rate of self-occupied houses is lower than the buy-to-let houses. Although it may not be found for a moment, the lender may check through various credit and bank records. Once the lender discovers the situation, the possible consequence is to require you to pay off the remaining loan in full immediately.

    What should you do then?

    Once you want to rent out a real estate, you first need to contact your lender to discuss remortgaging. In most of cases, the lender learns that the property would turn to buy-to-let, he  or she will ask you to convert the residential loan into a buy-to-let loan. The lender will need to conduct value assessment and rental income assessment to ensure that the rental income after leasing is 125% of the loan repayment amount.

    In some rare cases, some banks or credit institutions are willing to allow you to change the your property to a buy-to-let one while retaining the existing loan terms. It all depends on the wishes of the lenders. Some allow you to rent the property for a limited period of time, some will raise the interest rate slightly while other terms will remain unchanged. But usually, even if the lenders agree to keep the existing loan terms unchanged, they will charge you a certain handling fee.

  1. Remortgagingfor along-term loan

    The situation of cash purchase but hoping to transfer to long-term loan usually occurs in:

  - you buy the real estate from the auction and don't have time to apply for a loan.

  - the property itself is in poor condition, and there are a lot of renovation work to be completed, which cannot pass the value evaluation at the time of loan. Now the renovation work has been completed.

  - in order to lock in the price, you promised to complete the transaction quickly and didn't have time to apply for a loan

    In short, if you used to buy a house with full cash payment and now want to withdraw the cash and reuse it for other investments, you can use the method of remortgaging.

    But you need to notice:

    The bank stipulates that homeowners can only be allowed to apply for remortgaging after owning the property for more than 6 months, and the application process of remortgaging may take another 1-2 months. Therefore, if you use cash or short-term loans to invest in real estate, make sure to reserve sufficient working capital for 6-8 months. You can consider applying for a long-term loan after 6 months.

  1. Remortgaging after the fixed interest rateloanexpires

    Usually, the interest rate of a loan scheme will be fixed for several years (usually 2 or 5 years). After it expires, the interest rate will be automatically calculated according to the lender's conventional floating interest rate. For example, the fixed interest rate of your loan for the first two years is 3.49%. After the expiration of two years, the interest rate becomes the bank's regular floating interest rate of 4.99%.

    The reason that drives you to carry out remortgaging is to enjoy a lower interest rate through negotiation and regain the fixed interest rate. However, the transfer of loans is usually accompanied by other expenses: attorney fees, bank evaluation fees, wire transfer fees, handling fees, broker fees, etc. Through the transfer, you may save 1% on the interest rate and pay £ 50 less per month, which sounds a lot, but the total other expenses mentioned above may be as high as £ 2000. Therefore, before making the decision of loan lender conversion, it is still necessary to carefully calculate the cost.