Mortgage Refinancing in the UK: What You Need to Know

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The traditional mortgage term has historically been around 25 years, but in today’s market, many individuals, particularly first-time buyers, are opting for arrangements with terms extending to 30 years or more. However, it’s becoming increasingly uncommon for borrowers to maintain the same mortgage for the entire specified term.

In this context, understanding the reasons behind refinancing a UK property and the associated procedures becomes essential. Typically, a residential mortgage involves an initial period, usually two to five years, featuring a fixed or discounted interest rate. Following this period, the interest rate transitions to the lender’s Standard Variable Rate, often marked by a notable increase.

Here’s an example:

Suppose you secured a 25-year capital repayment mortgage two years ago, with a remaining balance of £150,000, a concluding two-year fixed rate at 1.5%, and the impending shift to the lender’s standard variable rate at 3.5%. In this scenario, your monthly payments are poised to increase by £149.07.

While such a sudden hike can be startling, the solution lies in a relatively straightforward process—remortgaging to another product. This entails starting afresh with a new fixed or discounted rate period. In the given example, the borrower could opt for a new 23-year mortgage, clearing the previous one at £150,000, and potentially benefit from reduced payments during the new fixed-rate period.

Considering the prevailing historically low interest rates, approaching the conclusion of your fixed or discounted period, or transitioning to the lender’s standard variable rate warrants a reassessment. Exploring alternative options in the market could lead to securing a more advantageous deal.

What is a refinance mortgage?

Refinancing your mortgage involves exchanging your current mortgage for a new one. The new mortgage pays off the existing one, consolidating them into a single mortgage with a unified monthly payment.

Why do people refinance their home mortgage?

Refinancing your home mortgage involves swapping your existing mortgage for a new one, simplifying payments. People refinance for various reasons:

Attractive Interest Rate: To benefit from a more favorable interest rate.
Lower Monthly Payments: Seeking to reduce monthly mortgage payments.
Equity Utilization: Making better use of the property’s equity.
Circumstantial Changes: Adjusting the mortgage due to changes like adding or removing someone.
Home Improvements: Raising funds for necessary home improvements.
Debt Consolidation: Reducing overall expenses by consolidating debts.

These reasons drive individuals to explore home refinance options as practical solutions.

What documents do you need when you refinance a home mortgage?

When pursuing a refinance, proper documentation is crucial. Lenders assess income, assets, debt, and credit scores to evaluate mortgage approval.

During the refinance application, the lender requests familiar details from your initial home purchase. They scrutinize income, assets, debt, and credit scores to assess your eligibility and repayment capability.

Ensure you have these documents ready for the application:

At least three months of bank statements
Income proof – For employees, three months of payslips & P60; for self-employed, 2 years of accounts, tax calculations, and tax overviews.
Recent utility bills
Address history for the past three years
Photographic identification like a driving licence or passport
Credit report from Checkmyfile, Experian, or Equifax

Following the application, the underwriting process begins. This involves the lender reviewing and verifying your application, alongside a property survey to determine its value.

Additional funds via a re-mortgage?

Re-mortgages commonly stick to a ‘like-for-like’ approach, aligning the new mortgage with the outstanding balance of the previous one. Alternatively, homeowners may tap into the increased value of their property over the past decade, opting to secure extra funds through remortgaging. For example, a homeowner with a £150,000 outstanding mortgage might pursue a remortgage for £200,000, unlocking £50,000 for other purposes.

Some of the most common reasons for raising additional funds via a re-mortgage include:

Home Improvements: Funding building extensions or significant alterations to your home often requires substantial amounts beyond available means. Borrowing the required sum via a mortgage is a common and cost-effective solution.
Raising a Deposit for a Home: Whether it’s for a second home, a buy-to-let property, or a first home for a family member, acquiring funds for a home deposit may not be realistic through savings alone. Opting for a re-mortgage provides an avenue to secure the necessary sum.

Debt consolidation via a re-mortgage

Consolidating debts through re-mortgaging is a tempting option due to the cost-effectiveness of mortgage borrowing compared to higher-interest loans. However, caution is crucial. Even without additional borrowing, seeking professional advice for the best market deal is wise. Consultation with a mortgage adviser is strongly recommended before consolidating any debt into the mortgage.

Important considerations:

Secured Debt: Debt consolidation turns unsecured debt into debt secured against your home.
Extended Debt Term: Mortgage terms can extend to 25 or 30 years, potentially longer than your initial debt terms, leading to a significant extension.
Total Repayment: While monthly mortgage repayments may seem lower, the extended mortgage term could result in higher total repayments compared to shorter-term, higher-interest debts.

Professional advice is pivotal; advisers assess whether consolidation is advisable, potentially suggesting a mix of consolidation and leaving certain debts unaffected.

Re-financing a bridging loan via a mortgage

Bridging loans, typically lasting 12 to 18 months, are often repaid by refinancing with a standard residential mortgage. Investors commonly use this strategy, securing a bridging loan for an uninhabitable investment, making it habitable, and settling the loan with a standard mortgage—a common practice for building portfolios.

In cases demanding swift action, like quick property purchases, where conventional mortgage timelines may delay payments, a bridging loan is an option. This allows fast transactions, paying the asking price promptly. Later, a mortgage replaces the bridging loan, offering flexibility in the dynamic property market.

Re-mortgaging a UK for expats

If you’re no longer a UK resident, there’s no hindrance to exploring re-mortgaging options when your fixed or discounted rate concludes. Shopping around for the best deals and utilizing the opportunity to raise funds for various purposes, such as home improvements or debt consolidation, is entirely feasible. However, expats should consider important factors, making professional advice beneficial.

For properties left empty, obtaining a re-mortgage may still be possible, contingent on insurance policy clauses specifying the property’s vacancy duration or return frequency. Planning to let out the property requires a buy-to-let mortgage, with expatriates facing higher interest rates and potential limitations on Loan To Value levels.

Does refinancing hurt your credit profile?

Refinancing offers a pathway to enhance your credit score by consistently making on-time and complete payments. The positive effect on your credit rating is particularly pronounced when the goal of refinancing includes reducing overall debt levels. Keeping credit card balances below their limits is a crucial aspect, as elevated balances can have adverse implications on your credit score.

Whether you currently possess a favorable credit rating or are dealing with a lower score due to past credit issues, it’s always worthwhile to explore refinancing options. This proactive approach can lead to potential benefits and improvements in your overall financial standing.