When you make payments towards the principal amount of your mortgage you build up equity in your home. The equity is the difference between your home’s value and what you have left to repay on your mortgage. This is the money you can expect to keep if you sell your home and repay your mortgage with the proceeds from the sale.
Many loans come with a maximum loan-to-value (LTV) ratio of 95%, which means you cannot borrow more than 95% of the value of your home. What this also means is that if you wish to remortgage you must have at least 5% equity in your home.
To put yourself in a really good position to remortgage, you should have at least 20% equity in your home.
Applying for remortgaging with no equity is difficult unless you can get someone to be a guarantor, however, this depends on the lender and is fairly rare with majority of mainstream lenders.
Remember that lenders look at your equity as a means to assess risk. The more equity you have, the less of a risk you are to the lender and vice versa.
When you choose to remortgage without at least 20% equity in your home, the lender is less likely to approve your application to remortgage. If you are approved, you will likely be charged a higher interest rate than you would be if you had 20% equity. This is because the more equity you have, the less of a risk you are to the lender.
Before comparing remortgaging options, find out how much equity you have in your home. If you don’t have a 20% deposit saved but aren’t far off the mark, it might make sense to wait until you’ve built up a higher amount of equity.
Alternatively, you can consider applying for a guarantor mortgage or applying with specialist banks that may have less stringent lending criteria for remortgage mortgages.
