The key reason you might want to refinance your property or your buy to let mortgage is to get a better deal or release some equity. However its a big decision and you need to run through our checklist to make sure its the right thing to do for you.
Before refinancing a mortgage, its important to take into account these considerations.
What Does Refinancing A Property Mean?
When you refinance your property, you essentially exchange your old mortgage loan for a new one with a new lender. You are left with just one monthly payment as the new lender pays off the previous debt on the old mortgage.
What Is Your Home Equity
Its important to know the amount of equity you have sitting in your property before you contact a mortgage lender. If your property is in negative equity, which means it has decreased in value below the current mortgage debt then refinancing might not currently be an option.
Over the last few years property prices have been shooting up in the UK so its unlikely you will be in negative equity. The best place to get your mortgage balance is to contact your lender or check for the last annual statement they sent you.
Then you need to find your properties current value, I normally go to Zoopla and use their house price tool. While its only an estimate I find its pretty accurate on the whole.
Take the house value from Zoopla and minus the current mortgage value to give you the equity you have.
For example if your house is worth £110,000 and you owe £50,000 then your equity is £60,000.
Know Your Credit Score
Since 2008 lenders have tightened their mortgage approval standards. Your credit score will be part of the decision used to decide what interest rate they offer you.
Borrowers with a low credit score will still be able to get a mortgage but it might be at a much higher interest rate.
You can quickly check your credit score before making a mortgage application on sites such as Experian, Equifax and Checkmyfile. See what the credit rating agencies think about your credit worthiness, if you have too many credit card or shorter term loans you might want to consider sorting those out first.
Understanding Your Debt-to-Income Ratio
It might seem simple to get a new mortgage loan if you already have one, however its important to keep in mind that lenders have become stricter with their debt to income ratios.
This was due to the credit crunch of 2008 when they lent money to anyone with a pulse. Even if you have a great salary, decent savings and a very stable job they want to ensure you can afford the monthly payments.
Ideally the lender wants to see that your mortgage payments make up no more than 28% of your monthly outgoings.
Before checking out new mortgage rates, it is advisable to consolidate debt and reduce it as much as you can prior to making an application.
The Costs of Mortgage Refinancing
When you remortgage your home its important to take into account all the fees. Some lenders offer lower interest rates giving lower monthly payments but have huge upfront fees.
Its vital to check all the fees and see which deal is better for you, remember you will need a solicitor as well to complete all the legal side of things.
You can reduce fees if you have a decent amount of equity in your property as they reduces risk for the mortgage lender.
I suggest you use a mortgage broker who has access to the whole market. Make sure when you speak to a broker you ask if they have access to the whole market, as some mortgage brokers only work with a small amount of lenders.
Interest Rates vs. Length Of Mortgage Term
When looking for a mortgage lender most people tend to focus on the interest rate when refinancing, however its also important to consider your goals in order to determine the best mortgage for your needs.
If your goal is to reduce your monthly payments, you should look for a mortgage with the lowest interest rate for the shortest period.
However Interest Rates can go up and down and some people prefer to fix a rate for longer periods to give them certainty. So if you want to know what you will pay for the next 5 years for example then you should be looking for the best deal for 5 years.
Typically the longer you fix the rate the higher the monthly costs will be but you will have more of an idea what you will be paying monthly.
Why Refinance A Property Rather Than Sell It
Refinancing your property is a very smart financial move, it provides you with fast access to the equity in your house with the stress and costs of selling. Remortgaging also offers lower interest rates and better loan terms which will save you lots of money.
You can use the equity you release for home improvements or debt consolidation this makes equity release much cheaper than a personal loan or credit cards.
How Does Refinancing A Property In The UK Work
Its very similar to when you first purchased your property although it does have some key differences. It is much faster to re-mortgage your property that it was to purchase it in the first place.
Applying
The best way to apply for your new mortgage is through a whole market broker (Remember ask them if they cover the whole market). They will collect all the information required to make the application, bank statements, payslips etc etc.
The broker will know which lenders would accept you based off your credit score, amount you want to borrow and much more.
You don’t have to use the same lender you are currently with, in fact its often easier to go with a new lender. The new lender will pay off all the outstanding debt owed to the previous mortgage lender without you even needing to speak to them.
Choosing A Fixed Interest Rate
Its advisable to pick a mortgage with a fixed rate rather than variable. Variable rates used to be popular but due to the 2008 financial crash its much more common for people to fix their rates.
When you apply they will fix the rate at the time of application so even if rates go up during your re-mortage you wont pay anymore.
Home Valuation Â
The next step is for the bank to send a surveyor round to your property to value it. Just because you feel your house is worth £200,000 the bank wont take your word for it.
Prior to the surveyor attending make sure you make a good impression, clean and tidy the property so it looks its best. If you have made any improvements to the property since you purchased it make sure to let them know as that will help get a higher valuation.
The bank will take into account this valuation before offering you a new mortgage, this is the slowest part of the refinance and can take a few weeks.
What Is The Purpose Of Refinancing Your Home?
Change Your Loan Term
When you refinance you have the option to either extend your loan or reduce the length of the loan. If you want to pay off your mortgage you might want to consider reducing the term to say 10 years.
On the flip side if you want to reduce your monthly payment you might want to extend the loan back up to 25 years.
Reduce the Interest Rate
The most common reason for a mortgage refinance is to reduce the interest rate you currently pay. When you take out a new deal you will get the best rate at that time, when your deal ends you go onto the standard variable rate which is often much higher.
Its likely that your monthly payment will be reduced by taking out a new mortgage.
Cash Out Your Equity
A great option when you take out a new mortgage is to release some equity. This is what I do to give me fund I use as deposits for new properties.
You can use the equity for whatever you want, paying off higher interest debts, renovating your property and much more.
I don’t think paying off your mortgage is a smart idea, read this post on why you should never pay off your mortgage.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property