Refinancing, also known as “refi,” is a strategy where existing debts are settled with a new financing arrangement. The goal is to secure more favorable terms, whether by lowering interest rates, adjusting payment schedules, or consolidating multiple payments into one. Borrowers often explore this option to improve their financial situation and have the flexibility to choose from various refinancing methods, including personal loans, secured loans, or remortgages.
What does refinancing mean?
Refinancing, a practice dating back to 1901, involves securing new financing to settle existing financial obligations. This process entails making adjustments to interest rates, payment schedules, and other terms, leading the borrower to enter into a new financing agreement.
Consider a borrower with a £2,000 overdraft and £6,000 credit card debt across three cards. Opting for refinancing, they might take out an £8,000 personal loan, potentially securing a lower interest rate. This transition allows them to move from revolving credit to a structured repayment plan with fixed monthly installments, offering financial flexibility and potentially reducing overall interest costs.
How to refinance investment property
Refinancing your investment property involves several steps. You’ll start by approaching a lender, discussing your refinancing needs, and negotiating the most suitable agreement. This process can be complex, but Rangewell can help simplify it by guiding you to the right lenders for your specific requirements.
If you decide to handle it independently, you must ensure you have sufficient equity in your property or meet any criteria set by your current lender (typically a waiting period of six months before refinancing is allowed). You’ll also need to prepare documentation to support your application, including a business plan and evidence of your property’s increased value or rental income.
Next, you’ll need to identify the appropriate lender, which could be a traditional bank or a challenger bank, and engage in negotiations with them. Keep in mind that you may be responsible for covering exit costs and new fees from both your existing and future lenders. Working with Rangewell can simplify this process and provide guidance every step of the way.
Why refinance investment properties?
Investment properties often undergo development or refurbishment to boost their value for tenants or buyers. As a property owner, it’s crucial to carefully assess development costs in relation to the expected return, taking into account the enhanced value of the property.
Refinancing becomes a valuable tool in managing these expenses by offering access to different loan options distinct from your initial agreement. For example, if you acquired the property at auction using short-term bridging refinance, you may be contending with elevated short-term repayment rates.
How to use refinancing to your advantage
In the realm of property investment, there’s ample opportunity to maximize the value of your investments with the right approach. Refinancing offers extended terms or reduced repayments, freeing up cash to fuel your investment growth. Here are a few strategies to achieve just that:
1. Increase your rental yield
Opt for refinancing to switch to a landlord-friendly loan, like a buy-to-let mortgage, or improve the terms of your existing one. Utilize the released capital to enhance your rental properties or explore expansion opportunities, such as converting properties into HMOs, which are increasingly popular in urban areas.
2. Finance portfolio growth
Consider a cash-out refinance to access funds for a new property’s deposit. After acquiring the new property, think about refinancing once again to consolidate debts, simplifying your repayment structure, even when you own multiple properties.
3. Consolidate multiple debts
Debt consolidation streamlines the financial management for all investors. By combining various loans into a single repayment plan, you can focus on growth more efficiently without juggling multiple debts.
Types of Refinancing
There are several types of refinancing options. The type of loan a borrower decides to get depends on the needs of the borrower. Some of these refinancing options include:
1. Rate-and-Term Refinancing
Rate-and-term refinancing is the most common form of refinancing. It involves paying off the original loan and replacing it with a new one that offers lower interest payments.
2. Cash-out Refinancing
Cash-out refinances are frequently used when the asset serving as collateral for the loan has appreciated in value. This process entails tapping into the asset’s increased value or equity in exchange for a larger loan amount, often accompanied by a higher interest rate.
In essence, if the value of an asset has risen on paper, you can access that increased value through a loan without the need to sell the asset. This choice expands the overall loan amount, providing the borrower with immediate cash while retaining ownership of the asset.
3. Cash-in Refinancing
A cash-in refinance allows the borrower to pay down some portion of the loan for a lower loan-to-value (LTV) ratio or smaller loan payments.
4. Consolidation Refinancing
Sometimes, a consolidation loan can serve as an efficient method for refinancing. This approach comes into play when an investor secures a single loan at an interest rate lower than the average rate they were paying across multiple credit products.
To execute this type of refinancing, the individual or business needs to apply for a new loan at a reduced interest rate and then use this new loan to settle their existing debts. This leaves them with a total outstanding principal subject to significantly lower interest rate payments.
The Pros and Cons of Refinancing
Here are some benefits of refinancing your mortgage:
- Decrease your monthly mortgage payment and interest rate.
- Shift from a variable interest rate to a fixed one for greater predictability and potential savings.
- Obtain additional cash for pressing financial requirements.
- Opt for a shorter loan term to minimize the overall interest you pay.
Consider these factors when refinancing your mortgage:
- If your loan term is reset to its original length, the total interest paid over the loan’s life might offset your savings from a lower rate.
- With a fixed-rate mortgage, you won’t benefit from interest rate drops unless you refinance once more.
- Refinancing may reduce your home equity.
- Opting for a shorter loan term will increase your monthly payments and entail additional closing costs.
Why Should You Refinance Your Home?
Homeowners consider refinancing for several reasons, with the primary goal being to secure more favorable loan terms. This typically involves obtaining a lower interest rate, which reduces mortgage costs and leads to more affordable monthly payments. Additionally, homeowners may refinance to modify the mortgage term or access home equity for purposes like debt consolidation or home renovations.