Knowing when to move your mortgage can be a tricky decision. Remortgaging is often a good opportunity to save money and access extra funds, but it’s important to understand how lenders view income when considering a remortgage.
This article will answer the question “Is a remortgage based on income?” and provide an overview of the factors that determine whether you’re eligible for a remortgage and how lenders use your income to calculate your borrowing capacity.
What does remortgaging mean?
Remortgaging is the process of switching your existing mortgage to a new lender or product, either with your current lender or a different one but without moving house. You’ll stay in your current home and use the equity you have in the property as security for the mortgage.
Remortgaging allows you to access more competitive interest rates and potentially save money on your monthly payments. It may also offer access to additional funds, allowing you to use some of the equity in your home for things like home improvements or a new car.
A remortgage with a new lender involves re-evaluating your current mortgage deal. They will take into consideration the remaining balance of your current loan, the value of your property and all associated income and expenses to create a new mortgage that replaces and pays off your old one.
Why do people remortgage?
There are many different reasons why people make changes to their mortgage. A few of them are below:
1. To access more competitive interest rates: By remortgaging, it is possible to take advantage of lower mortgage rates, allowing you to secure a better deal and save money on your monthly payments.
2. To release equity from their property: A remortgage can be used to access extra funds which you can use for any purpose, such as home improvements or buying a new car. This is done by releasing some of the equity built up in your home over the years.
3. To pay off existing debts: By transferring debt onto a remortgage, it may be possible to reduce overall monthly payments and save money on interest rates. It is important to carefully consider all options before consolidating existing debts into a mortgage, however, as this could end up costing more in the long run if not managed correctly.
4. To switch lenders: The terms of a remortgage agreement may be more favourable than the terms of your current mortgage, making it worthwhile to switch lenders. A new lender could offer better interest rates and repayment periods, as well as other incentives such as cashback or no early repayment fees.
5. To secure a longer-term deal: Remortgaging can also secure a long-term mortgage deal that may not have been available when you first took out your loan. This can help provide security for future payments and peace of mind in knowing exactly how much you need to budget each month for the duration of your deal.
You may like to read about the other acceptable reasons for a remortgage.
Is remortgaging based on income?
You would be forgiven for thinking that there’s no need to prove your income if you just need to borrow the same amount of money. I mean you have been making the payments on time for years now.
That may be the case if you stay with the same lender.
But any new lender will want to see proof of your income and be happy with your ability to keep up with the repayments.
Mortgages associated with your own home are regulated by the Financial Conduct Authority and lenders work out what you can borrow based on your income.
The FCA rules are there to protect homeowners, making sure that they can only borrow amounts that are affordable and relative to their financial situation.
How will lenders look at my income?
Each lender uses different criteria to assess your income and decide how much you can borrow. Some lenders have a strict approach, while others may be more flexible.
Here are some of the commonly used criteria based on employment status:
This is relatively straightforward, the lender will use some recent payslips and P60 to work out your gross annual earnings. Any overtime tends to get averaged. The total gross figure is then used as your yearly income for the purposes of a mortgage.
When you’re registered as a self-employed sole trader, lenders will look at your trading history and income receipts. As proof of this they may require full trading accounts validated by an accountant. It’s also common for lenders to ask for the SA302 year-end tax calculations from HMRC, either instead of or in addition to full accounts. Generally, you’ll need two years’ worth of documents and records, but some more specialised lenders can work with just one year.
When it comes to self-employment as a partner in a business, lenders will evaluate your income using partnership trading accounts and your own self-assessment returns/SA302. Your personal income before tax will used to work out the mortgage figures.
If you’re the director of a limited company, lenders will be happy looking at your PAYE income and also recent dividends. They will normally ask for company accounts and SA302s to assess your earnings. A less common approach is evaluating your income based on the share of company profits.
Finding a lender that will calculate the mortgage using retained profits will normally allow you to borrow more money.
When applying for a loan as a contractor, lenders will take into account the length of time that you have been working in that capacity as well as any accounts or SA302s you can provide. Additionally, specialist lenders may use the day rate on your current contract to calculate an annual gross income figure based on working five days a week and four weeks’ holiday per year.
For subcontractors registered under HMRC’s Construction Industry Scheme (CIS), lenders have varying approaches when it comes to assessing income and loan affordability. A few lenders will ask for three to six months’ worth of CIS payslips and calculate your CIS annual income based on the gross payments shown. Plus, they will also take into account how long you have been working with the same contractor or in a similar field.
Can you remortgage on a low income?
Yes, remortgaging with a low income is possible. However, depending on the lender, there may be minimum income requirements that must be met. Generally this can range from £10,000 – £20,000. There are also lenders that don’t require a set minimum income amount; instead they will review your complete financial situation and the size of the remortgage to determine affordability.
To get the best outcome you need to have a good credit history and a low, loan to value (LTV) percentage.
How do lenders work out affordability?
Your chosen lender will conduct an affordability check when you apply to calculate the amount of money you are able to borrow. This process looks at your income and expenses; if you have a lot of expenses every month, then your potential borrowing amount could be lower.
Your debt-to-income ratio, or DTI, is an important part of this process because it’s a way for lenders to compare your income to your debt repayments. Your monthly debts are divided by your gross monthly income to calculate the Debt-to-Income (DTI) ratio.
Common monthly debt payments will include:
- Credit card payments
- Student loan payments
- Car loan payments
- Personal loan payments
- Interest free credit
- Hire purchase
If your ratio exceeds 50% then you may be borrowing beyond what is affordable.
Then they will look at other regular spending. Examples of monthly outgoings that are considered can include regular payments for things like:
- household bills
- childcare costs
- transport costs
- gym memberships
- mobile phone contracts
Your lender will take all of this into account when working out your monthly affordability.
Ultimately, lenders need to be certain that you can make your monthly repayments on time and in full. Therefore, it’s important to always check what information the lender requires before applying for a remortgage so you can be better prepared.
In conclusion, remortgaging is a great way to access competitive interest rates and potentially save money on your monthly payments. It can also provide you with the opportunity to release equity from your property or pay off existing debts.
However, when switching lenders it’s important to remember that any new lender will require proof of income in order for them to be happy with your ability to keep up with the repayments. By understanding these requirements and taking into account all associated expenses and incomes before making a decision, you should be able to find an affordable mortgage solution that works best for you.
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