What are your options if you can’t remortgage?

When your current mortgage deal ends, for example when a fixed term deal finishes after two, three or five years, or when you need to borrow more money against your property, it could be time to consider a remortgage.

But what do you do if you’re turned down by lenders and find yourself in a situation where you can’t remortgage?

This is an issue that more people are facing, partly due to the Bank of England’s base rate increases as it tried to manage inflation, which resulted in higher mortgage interest rates. In turn, this can mean that, when people’s fixed term deals end, they often face significantly higher mortgage repayments which affects their affordability.

In this article, our experienced team of independent mortgage advisers at PIL Southampton look at why not being able to remortgage might happen and what you can do about it.

What are mortgage prisoners? 

‘Mortgage prisoner’ is a term that describes people who find it difficult to switch to a cheaper mortgage deal than the generally higher variable rate they are automatically switched to when their current deal ends.

This could be because affordability assessments are more strict now than they would have been when you took out your previous deal.

It could also be because your existing lender is no longer offering new products, meaning that you are automatically switched to their variable rate.

If your existing lender is still offering new fixed rate deals, they are likely to make these available to you.

Being a mortgage prisoner can trap you in a property if you want to move house, or it can mean that you can’t get a favourable remortgage deal.

The Financial Conduct Authority (FCA) changed the rules a few years ago, which could be helpful for mortgage prisoners. You can review their guidance here.

Common reasons for remortgage rejection 

Each lender will have their own rules around eligibility criteria for approving remortgage applications. However, there are several common reasons that generally apply across the board.

Affordability Issues

Applying for a new mortgage will mean going through the same affordability checks as when you originally applied for your mortgage. They have a responsibility to make sure that you are not over-stretching yourself financially and they don’t want to approve a deal where you could be borrowing more than you can realistically afford to repay.

After all, missing mortgage payments would negatively impact your credit score which could make obtaining credit in the future more difficult. The worst-case scenario is that you fall behind with your payments and end up with your home being repossessed.

If your personal circumstances have changed, like having more family commitments, changing jobs or going self-employed, your application may get declined as your debt to income ratio could look too risky.

Also, higher interest rates could squeeze your capacity to repay which could be another reason for your application being turned down from an affordability perspective.  

Nearing the end of your mortgage term

Your application may be rejected if you are nearing the end of your mortgage term and your remaining balance is quite low. In this situation, it may not be worth you remortgaging, due to the fees that may be applied to the remortgage, or if you’re charged early repayment fees if you leave before the new deal ends.

High loan-to-value ratio

Another issue could be your loan-to-value (LTV) ratio, which measures your outstanding mortgage balance against the value of your property. The more you borrow, the higher your LTV is going to be. Your LTV may also go up if your property value falls. The reason most lenders won’t lend over 90% of the value of your home is to reduce the risk of you falling into a negative equity situation, which is when you owe more on your property than the value of that property.

Note: You can find out if you are in a negative equity position by checking your mortgage statement (or contacting your lender) to find out how much you owe, and getting a current valuation on your property from an estate agent or surveyor. If the valuation is lower than your outstanding mortgage balance, that means you are in negative equity.

Financial history

Just like when you applied for your original mortgage, your lender will run credit checks on you to get a view on how you have managed your money over the past few years. If your credit report is poor, they may be concerned about your future financial behaviour and that you may not be a reliable borrower. This could result in the lender either turning your application down, or offering you limited options and higher interest rates due to the higher risk you’re deemed to be.

Missed mortgage payments or being in arrears 

Being in arrears with your mortgage, or missing mortgage payments over the previous 12 months, could make it harder to get a new mortgage deal, and certainly one with a competitive rate.

Steps you can take to improve your chances of remortgaging 

Stay loyal to your existing lender

Your existing lender knows you, and may therefore be more accepting of any changes in your situation. If you stay with your existing lender and don’t need to extend your borrowing, this is a straightforward product switch and won’t need to be reassessed through the affordability checks.

If you need to borrow more and wish to do so with your current lender, you can apply for a further advance or remortgage but, in either case, you will go through the same affordability checks as a new mortgage application. However, working with your existing lender should make the process quicker and you might avoid the valuation fees and solicitor fees that could apply if you go to a new lender.

Adjust your mortgage structure

One way to increase your affordability would be to extend your mortgage term as this would reduce your monthly payments. However, this would also mean paying more interest over the course of the mortgage term.

You could also reduce your monthly payments by switching to an interest-only mortgage, or part interest-only and part repayment mortgage. However, it’s worth noting that the criteria for interest-only mortgages on a short-term basis is quite strict.

Typically, a short-term interest-only mortgage would run for up to six months. The interest rolls up and it normally leads to a longer term period. If you want to permanently move to an interest-only mortgage then you’ll probably need to meet a strict income criteria as well as having a certain level of equity in the property, and a robust repayment strategy in place.

Fewer lenders offer interest-only mortgages than standard mortgages and, the ones that do, will ask for a minimum deposit of 20% and could ask for as much as 50%. Interest rates tend to be higher, and some lenders will only approve interest-only mortgages to those with an annual income above £75,000.

Leverage professional help

Talking to a ‘whole of market’ mortgage broker, like the team at PIL Southampton, will ensure that you are aware of all the options available to you across the marketplace. 

Manage your credit score 

Check your credit report with the three main credit agencies in the UK: Equifax, Experian and TransUnion. Make sure you are registered to vote so they can easily see who you are and where you are.

Take these direct financial actions and carry out a financial ‘cleanup’

1. Set up direct debits to pay your regular bills, like utilities. Showing how well you manage your money helps you to build up your credit history and will be viewed favourably by lenders.
   
   
2. If you can, make overpayments on your mortgage or pay off a lump sum to lower your LTV. This reduces the lender’s risk which makes you a more attractive borrower.

Note: Before you make overpayments, check with your lender if this will incur any early repayment fees. Many lenders let you pay up to 10% of your mortgage per year at no extra cost.

1. Where possible, reduce your debts to improve your affordability criteria. And try to reduce your ‘credit utilisation’ ratio to a maximum of 30% of your available credit card balances and overdraft balance. This will demonstrate that you are a responsible borrower and not over-stretched.
   
   
2. Cut back on non-essential spending where you can, like takeaways and subscriptions you might not need. This will also boost your affordability when you are looking to remortgage.
   
   
3. Consider adding a guarantor to your application, further reducing the risk to your lender. This is a serious decision, though, as their property would be used as security if payments aren’t kept up, and they could lose their home.
   
   
4. Perhaps delay your remortgage application until your income or credit score improves. 

Get further support

If you are experiencing financial difficulties and are concerned about keeping up with your mortgage repayments, speak to your mortgage provider.

You may also find it helpful to get free debt advice from an organisation like Citizens Advice or StepChange.

Remember, your mortgage is a secured loan; if you fail to keep up with your mortgage repayments your home could be repossessed which could result in you becoming homeless.

How PIL Southampton can help you 

Our expert team of financial advisers has extensive experience in helping our clients with every scenario regarding remortgaging. We will get to know you and your individual circumstances to advise you as helpfully as we can. 

We know what products are available across the marketplace, and which lender is likely to be the best option for you to apply to. For example, there are particular lenders who provide bad credit mortgages, and others who provide mortgages specifically for self-employed people.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.