If you already have a mortgage on a property, you may have considered refinancing. Also known as remortgaging, this process allows you to take out a new loan from a new lender – or even the same lender – to pay off your original loan. You may be wondering, what does refinancing a mortgage mean? While there are many reasons to refinance or remortgage, the process is generally the same.
Read on to find out more about what refinancing a mortgage is, how to do it, and whether it's the best choice for you:
If you're planning on moving your mortgage from one lender to another in the UK, you may have heard the term remortgaging. Refinancing means the same thing – it's just a more generic wording for all kinds of loans instead of for your mortgage in particular. So when you search for refinancing offers for your mortgage, don't get tripped up on these two different types of wording.
So, what does refinancing a mortgage mean? In essence, when you refinance a mortgage, you are taking out one loan to pay off another. You can think of refinancing as a chain. Instead of taking out a mortgage to pay off the property, you're taking out a mortgage to pay off the previous loan, which in turn was paying off the house. There is a range of reasons why you may choose to refinance, which we've covered in detail below.
Refinancing your mortgage can have a wide range of different benefits, including:
A key reason you may choose to refinance your mortgage is to gain access to better interest rates. You'll typically be put on a deal for your mortgage for the first two to five years in the UK, essentially fixing that interest in place. Once that deal is over, you'll then be moved to the Standard Variable Rate. This rate will fluctuate as the market does, and you can often end up paying far more as a result.
If you can get a better deal for your mortgage, refinancing may be a good idea. For example, if you purchased your home when rates were particularly high, you can reduce your payments on a new, fixed rate that's more in line with current markets. Mortgage deals can include a range of benefits, including overpaying to reduce your payments over time. If your existing mortgage isn't doing it for you, shopping around might be the ideal solution.
Refinancing is an excellent place to start if you want to reduce the time left on your loan. If your current mortgage doesn't allow overpayment or lump sum payment, you can switch mortgages and decrease your debt simultaneously. If you have an inheritance or nice lump sum put away, that could reduce the years on your next mortgage by a significant amount of years.
Are you planning on home renovations or looking to start a deposit on a new, second property? Then getting cash out of your mortgage is one way you can access those funds. You can even utilise cash in your mortgage to consolidate your other debts if necessary. If you'd like to access some money, refinancing is worth considering as one of the options available to you.
Refinancing or remortgaging is in many ways the same as getting your mortgage in the first process. You'll be required to pass all the necessary credit and financial checks, and you'll want to shop around to find a deal that is most suitable for you. A mortgage broker can be just as valuable for refinancing as they are in securing your initial mortgage, especially if you have specific reasons to refinance.
If you find a mortgage offer that suits your needs, you'll then need to begin the process of moving your loan over. In some cases, this is a simple and free process. But keep an eye out for costs and fees relating to leaving your existing mortgage early, as these can be significant in some cases. You should ensure you get better terms from your new mortgage overall before you make the switch, especially if you're aiming to save money by remortgaging.
If you choose to refinance with the mortgage lender you already use, this is called a product transfer and can be more straightforward than refinancing with a different lender entirely.
There are three common types of refinancing you may opt for on your mortgage:
This straightforward loan refinancing option is where the loan amount remains the same, and the only changes are the loan term or interest rate. This is the most suitable option for anyone looking to save on monthly payments or for those wanting to move to a fixed rate that lasts longer.
If you'd like to access funds from your property's equity, a cash-out refinancing option ticks the boxes. This gives you the money needed for remodelling, debt consolidation or anything you need cash for. As a result, refinancing on these terms often leads to higher payments and interest rates.
If you want to reduce your mortgage balance and have free cash, cash-in refinancing offers a great solution. By putting more money in immediately, you reduce the length and overall cost of your mortgage. If you can put a significant sum in, you may even be able to access lower interest rates, too.
Much like when you apply for a mortgage, the process of refinancing is based on your current finances and credit record. A lender will check your credit history, employment, income and payment history to determine whether you're a suitable borrower. They'll also look at the value of your home and other debts you hold. The better your credit history and finances, the greater the chance of finding a suitable refinance option based on your goals.
As a qualified mortgage broker, Mortgage Mentor is your ideal companion for mortgage refinancing. Get in touch with our friendly team today for free advice on finding the most suitable remortgage options for your needs.
As a mortgage is secured against your home/property, it may be repossessed if you do not keep up with the mortgage repayments.
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