Changed circumstances can complicate the remortgage process, but lenders with flexible underwriting techniques can help
Remortgaging has increased in popularity over the last few years as the latest figures from the Council of Mortgage Lenders (CML) clearly show. While the market remains strong, the reasons for remortgaging vary from borrower to borrower and if someone's circumstances have changed since they last obtained a mortgage, it may be more difficult for a broker to place the application than the borrower first imagined.
The latest CML statistics show that, despite a fall from a record high in January 2002, remortgaging still accounted for 38% of all gross lending in February of this year. In quarter four of 2001, 57% of those that remortgaged chose a standard repayment, rather than an endowment or interest-only and in the same period, 54% of all remortgages were for over £50,000.
As a percentage value of all loans, remortgaging has grown steadily from 22% in quarter four of 1999 to 32% in quarter four of 2001, while for buy to let it was 40%. This is clear evidence of a healthy and sustained interest in remortgaging from borrowers. But what motivates a borrower to remortgage and how does it change the way they are treated by lenders?
One of the most popular reasons for remortgaging is to reduce monthly mortgage repayments with a lower rate of interest. Of those that remortgaged in quarter four of 2001, 53% did so onto a discounted rate and 21% on to a fixed rate lasting a year or more.
Many other borrowers remortgage to raise capital. The reason behind this falls into two camps ' those who raise capital for holidays, home improvements, education and so on, and those who use it for business purposes. With over three million self-employed individuals in the UK, this can form a substantial part of this market.
Remortgaging to consolidate outstanding debt has also grown in popularity over the last few years and is a reflection of the recent growth in personal sector borrowing, which grew by 16% from quarter four 2001 from the same period the previous year. In the UK alone, we used credit cards to spend a massive £8.8bn in 2001.
None of these reasons for remortgaging are mutually exclusive but they can affect how a lender views the case.
In most instances, lenders will treat a remortgage as they deal with any other application. It would follow the same underwriting procedure and be subject to the same criteria as a new borrower. Some lenders have introduced special remortgage-only products that make the whole remortgaging process as straightforward as possible.
Exceptions to the rule
There are, however, some exceptions to the usual criteria and underwriting procedures when remortgaging. Some lenders will have restrictions on the amount of capital raising allowed, be it a monetary amount, or a proportion of the total loan that the capital raising element represents.
If capital raising is for business purposes, then restrictions are often tighter due to the added risks involved. Many borrowers who remortgage for this purpose are self-employed, and the success or otherwise of the business venture they are investing in may affect their ability to repay the loan. This means a cap is often put on the maximum loan to value (LTV).
The acceptability of debt consolidation when remortgaging will vary between lenders. The major issue on this type of loan is the transferring of a short-term debt into a long-term one. Borrowers in this case may want to have flexible payment facilities on the product that will enable them to make overpayments without penalty, to avoid transferring a short-term debt to a longer-term one.
A change in circumstances
Most people have not had any life changes or developments that alter their risk statusš as a borrower. They may have married, had children or had a growth in their personal income but this should not affect how a lender views them. So what circumstances do make a difference? Should borrowers be advised not to remortgage if these changes affect how lenders perceive them?
Changes that affect a borrower's status fall into two broad categories: income and impaired credit.
Over three million people in the UK, are self-employed and every year thousands of people choose to set up in business for themselves. With no proof of income as a sole-trader, lenders can see them as more of a credit risk. Likewise, those who choose to retire early with no earned income are immediately rejected by a lender's credit score if they wish to remortgage.
Divorce can also impact on either party's income. In 2000 alone, there were over 140,000 decrees absolute. In some cases partners can be left with a vastly reduced income, or solely rely on maintenance payments. Divorce can lead to problems managing finances and this can mean borrowers have an impaired credit record. It is difficult to place an exact figure on the number of people with finance problems. However, the personal sector borrowing figures show an increased reliance on credit in the UK, and mortgage arrears figures state that over 80,000 mortgages were three to six months in arrears in the second half of 2002.
What these changes mean, in the eyes of some lenders, is that a borrower changes status from prime to niche, non-status or non-conforming.
Is it wise for these people who may be looking to raise capital, consolidate debt or reduce monthly payments to attempt to remortgage? The advice of a broker can be of great value in more complicated cases such as these.
Borrowers may in the first instance want to try the lender they currently have their mortgage with. As they have built up a history with this lender they may be more understanding to the changes in their lifestyle and be willing to adapt their criteria to suit the demands of the borrower.
Looking for business
With increased competition in the mortgage market, lenders are desperately fighting to retain borrowers and this may work in their advantage. However, in some cases the original lender may not provide what the borrower wants, or be willing to lend to them, particularly in the case of capital raising where more money is required.
Brokers must then look to other lenders to provide the solution. It is at this stage, where track records have not been developed with lenders, that borrowers may find it hard to get the deal they are looking for. It may then not be as straightforward as they had imagined as they will usually be declined as a result of strict credit scoring. The solution at this stage is for brokers to identify those lenders willing to assess cases on an individual basis. These lenders understand that while people's circumstances change through the course of a lifetime, they can still meet mortgage repayments.
Remortgaging is a popular market and borrowers whose circumstances have changed should not be excluded from doing so. It is up to brokers to advise these borrowers as appropriate, depending on the severity of these changes, and work with lenders who are able to take a flexible approach to the more unusual cases.
Jeff Knight is residential mortgage marketing manager at Sun Bank
A change in income or impaired credit can affect a borrower's status and make remortgaging difficult.
If remortgaging to raise capital for business purposes, lenders may make criteria tighter and lower the maximum LTV.
Lenders that assess borrowers on an individual basis can be more sympathetic if their circumstances have changed.
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