Is this how a Remortgage works?

Skeeter

Skeeter

Skeeter

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Sorry for what's probably an obvious question for some, but I've never Remortgaged before (I've not had a Mortgage either yet, but were planning ahead for when our fixed term ends on a house were buying).

Imagine we buy a £100k house at 90% LTV with £10k deposit. After 2 years it's worth £110k and we have paid off £10k so we now have a loan amount of £80k on a house worth £110k, meaning our LTV is 72%.

If we then remortgage, can we move to a higher LTV than is outstanding and use that to release some cash? So if we took an 80% LTV remortgage we would get an £88k loan but only need £80k of it to pay off the existing mortgage, freeing up £8k? And if that's the case, where does that £8k go? Does it just arrive in our bank? And I assume you would need to justify with the lender why you want to borrow more than the outstanding loan amount?

The reason I ask is we have a 2 year fixed term mortgage at 90% for our first house. With house prices rising and savings accounts paying low rates we were thinking it's better to overpay on the mortgage than to put money in savings. But in a couple of years we want to redo the kitchen so would want to get some of our savings back out of wherever we put them.
 
Skeeter said:
Sorry for what's probably an obvious question for some, but I've never Remortgaged before (I've not had a Mortgage either yet, but were planning ahead for when our fixed term ends on a house were buying).

Imagine we buy a £100k house at 90% LTV with £10k deposit. After 2 years it's worth £110k and we have paid off £10k so we now have a loan amount of £80k on a house worth £110k, meaning our LTV is 72%.

If we then remortgage, can we move to a higher LTV than is outstanding and use that to release some cash? So if we took an 80% LTV remortgage we would get an £88k loan but only need £80k of it to pay off the existing mortgage, freeing up £8k? And if that's the case, where does that £8k go? Does it just arrive in our bank? And I assume you would need to justify with the lender why you want to borrow more than the outstanding loan amount?

The reason I ask is we have a 2 year fixed term mortgage at 90% for our first house. With house prices rising and savings accounts paying low rates we were thinking it's better to overpay on the mortgage than to put money in savings. But in a couple of years we want to redo the kitchen so would want to get some of our savings back out of wherever we put them.
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yep.. spot on
 
If you are buying with 90% LTV and are aiming to have repaid a ninth of the mortgage in 2 years then you'll likely need to be on a relatively short term mortgage or be making significant overpayments. Also don't forget you may need to pay to have the house revalued depending on what product you go for.

I can't see you needing to have any significant justification for wanting to borrow more than the outstanding loan amount for such small sums. Home renovations would be a good enough reason.
 
Bear in mind some mortgage products have restrictions on how much you can overpay without penalty. This may limit how much you can overpay and subsequently how much equity you have.
 
HangTime said:
If you are buying with 90% LTV and are aiming to have repaid a ninth of the mortgage in 2 years then you'll likely need to be on a relatively short term mortgage or be making significant overpayments. Also don't forget you may need to pay to have the house revalued depending on what product you go for.
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sparkymark75 said:
Bear in mind some mortgage products have restrictions on how much you can overpay without penalty. This may limit how much you can overpay and subsequently how much equity you have.
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My example above was just to illustrate my thinking.

However, we are seeing house prices increase at 5-10% in the area, and are planning on putting £500+ a month in over payments (which is under the 10% per year over payment cap), so if we aren't below 80% LTV within 2 years I will be very disappointed.
 
The big question is:

What is the mortgage rate, what is the savings rate? Overpaying may feel better but it might be better off saving. No worries of over paying too much either
 
If your in all seriousness going to be wanting to improve the kitchen in a couple of years, just save. The impact of the marginal difference in rates will be negligable. Paying extra is only really a big bonus for the long term, ie to reduce the mortgage interest by getting it paid off early.

Most products don't have guaranteed drawdown, ie you need to apply for it, what if they say no? Don't rely on the lenders, a) letting you draw down more money or b) make the assumption you will move elsewhere for a better mortgage rate. Plan for them to happen but back this up with a plan for what happens if it doesn't.

You should always maintain some savings for immediate short term issues, such as broken appliances, a short gap in employment/earnings etc
 
I wouldnt overpay your mortgage to then "take it back out" if that makes sense. You might be slightly better off interest wise but you may also find that the money you are overpaying could be tied up in the property if the value doesnt rise as much as you expect or you cant rule out a change in the law etc.
 
Something else to bear in mind is this....Banks do have limits on what monies you can release.

My example is this. Im with Natwest (you maybe also). Minimum i can release is 10k equity, few years back there was no minimum. So if you were with Natwest you wouldnt be able to release your 8k. You would need to release 10k min...which b*ggers things up for you.

Also if you wanted to swerve this 10k min if you were with Natwest...say you wanted to go with Santander, you may have a release clause with the Natwest mortgage of a few thousand...which negates the reasoning to over pay and its advantages with the route to releasing the positive equity.

Another note is also, banks generally tend to undervalue your house when it comes to remortgaging...my example, our house in the open market right now is work 370k-380k...Natwest have it valued at 320k...this lowers our LTV. I have a meeting with the bank tomorrow about releasing equity for a new kitchen/extension/home improvements and a month back a local estate agent had valued our house at 350k....last week a house of a lower standard/desirability ie 3 bed terraced, rather than a 3 bed semi...went on the market for £370k.
Before the difference between 350k and 320k wasnt going to affect us getting a better % rate with the LTV, now...this maynt be the case as the bank now may value it higher than 320k.

Its not always that simple and the banks change the rulings on releasing equity, just 2 years ago i released £4k. Now i couldnt.

Hope that all makes sense. Food for thought. May all be rosey now, but say for instance Brexit actually happens, house prices as some say may fall...it could be playing against us all in 2 years time.
 
Hey Kingdom - you need to fully star out all swear words - but not that we'd consider buggers to be a swear word! :)
 
Skeeter said:
My example above was just to illustrate my thinking.

However, we are seeing house prices increase at 5-10% in the area, and are planning on putting £500+ a month in over payments (which is under the 10% per year over payment cap), so if we aren't below 80% LTV within 2 years I will be very disappointed.
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Personally I would not be banking on house prices to keep ramping at that rate to guide an investment decision in 2 years time - but each to their own.
 
Skiddley said:
Nor is the re-mortgage. If you want financial prudence, stick the kitchen on a 0% card, or find a 0% finance offer. OP could buy the kitchen now, enjoy it for longer, and not pay any interest.
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I didn't say it was? No need to over react just making sure the op factors everything in! 0% finance like you say can be great we had a load of John Lewis carpets fitted last year and the 0% over 12 months came in very handy!
 
Phreaky said:
Personally I would not be banking on house prices to keep ramping at that rate to guide an investment decision in 2 years time - but each to their own.
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Current rate of increase is 9% in the area. I've estimated 5% as a cautious figure.

Our rate is 2.5% at 90% LTV. I'm not planning on pulling back out all the money we overpay in. We would go as far as we can to get into the best rate we can and then any extra we would take back out and put towards the kitchen. The aim of overpaying is the long term reduction in the loan period. We would continue to overpay after 2 years too. Basically for as long as we have spare cash (I.e. until kids).

Imagine the steps for different rates are 80% and then 70%. If we had 75% LTV we would go for an 80% mortgage and free up the 5% as cash. I'm not suggesting I overpay loads then then go back to a 90% LTV again :p. Freeing some cash up is just a bonus, the primary aim is to overpay as much as possible for as long as possible.
 
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