When property prices dip, your property value will lower while your outstanding mortgage balance remains exactly the same. This fundamentally shifts your financial position, and can make it difficult to remortgage. At the same time, if your existing mortgage's fixed term is coming to an end, you will be shifted from your lower interest rate to the mortgage lender's standard variable rate and could end up paying significantly more money in monthly payments. Many homeowners in this position seek to learn how a lower property value could affect their remortgage options.

Here, the expert remortgage solicitors at JMW explain the factors that could affect your ability to remortgage and the interest rates available if your house price has fallen, along with the steps you can take to improve your financial position in some cases.

How Do Falling House Prices Affect the Loan to Value (LTV) Ratio?

When property prices fall, your mortgage debt represents a higher percentage of your home's worth. This is expressed through a calculation known as LTV.

Lenders use a loan-to-value calculation to assess the risk of your remortgage and determine the interest rate they will offer you. To find the LTV, a lender divides your outstanding mortgage by the current market value of your home, to compare your loan amount against the property value. A drop in house prices, or anything that affects your house specifically, will cause your loan-to-value ratio to increase instantly.

Lenders offer their best rates to homeowners with a lower LTV, and view a higher LTV as more risk. This means your new LTV will place you in a more expensive interest rate bracket, and could mean that it is more expensive to remortgage than to remain with your current lender. However, the other factor that will affect this is your lender's standard variable rate.

Should I Stay With My Current Deal?

When your current mortgage deal ends, you will automatically transition to the lender's standard variable rate. The lender controls this variable rate, meaning they adjust it at their discretion, often independently of the Bank of England base rate. As such, this variable rate is typically much higher than an initial fixed rate.

It is important to compare the remortgage deals available to determine whether an increase in your monthly repayments under your current, variable rate mortgage would be more than the repayments you would have to make under a new deal with a higher LTV.

You can search for a new mortgage deal up to six months before your current deal expires, as most mortgage offers remain valid for six months.

What if I Fall into Negative Equity?

Negative equity occurs when your outstanding mortgage balance is higher than the property value. This status will strictly limit your remortgage options, and moving to a different lender when you fall into negative equity will be especially difficult. Most lenders require at least five per cent equity to approve a new mortgage application, although some lenders specialise in mortgages for home owners in this position.

If you can make overpayments on your mortgage, this will actively reduce negative equity over time. Committing extra funds to the principal debt closes the gap between what you owe and what the house is worth. There may be other ways you can adjust your financial position, even in these circumstances, and you should speak to a financial advisor or mortgage broker about your options and the best remortgage deals available in these cases.

What if I Want to Remortgage to Release Equity?

Your options may be different if you are remortgaging to release equity for home improvements or to consolidate debts, rather than to avoid moving to a variable rate. A decrease in house value limits the equity available for withdrawal, and lenders typically cap your loan at a specific loan-to-value limit. If your property value has fallen, you may not have enough equity to cover the additional funds required.

This does not mean that you cannot remortgage, only that you must manage your position carefully. You must understand exactly how much equity you hold before applying for additional funds. If a standard remortgage with a new lender is restricted, there may be alternatives to a full remortgage that you can explore with the same lender, including additional borrowing.

If you intend to use the released equity for home improvements, these could increase the property value over time, which could also offer a route to a better financial position. However, if you are aiming to remortgage before your fixed rate ends, you may be subject to early repayment charges that could affect the viability of this approach.

Should I Extend My Mortgage Term?

If interest rates rise and you are not in a position to remortgage for a better deal, another way to potentially save money is to extend your mortgage term. This can reduce your monthly repayments and provide immediate financial relief if changing interest rates have created immediate pressure. However, while spreading your loan over a longer period lowers the capital amount you pay each month (and could improve affordability calculations during the remortgage process) it will result in paying more total interest over time.

Taking this step can mean that you will remain in debt for a longer period and slows the rate at which you build equity. For this reason, it may only be advisable as a short-term solution in these cases.

Do I Need a Solicitor to Switch My Current Mortgage?

If you make a product transfer with your current lender, it may not be necessary to use a solicitor. However, if you are changing to a different or specialist lender, you will need a solicitor to carry out various conveyancing tasks, like verifying your financial situation on behalf of the lender, and updating the legal documents that state how the property is owned.

At JMW, our property litigation team and conveyancing specialists take a direct, creative approach to property conveyancing, which enables us to anticipate and resolve problems before they arise. Our residential real estate solicitors can keep your remortgage moving without unnecessary delays. We negotiate effectively with lenders and help you to secure the most advantageous position possible, regardless of the current market conditions.