How does refinancing work and when should you refinance?

Refinancing is when you take out a new mortgage to replace your existing one. The first loan is paid off, allowing the second loan to be produced, this is done to allow you to obtain a better interest rate and ideally reduce monthly payments. The mortgage refinancing process is pretty much the same as when you first apply for a mortgage. It is ideal to speak with a mortgage advisor to explore your options. A mortgage advisor can help you with the whole process from start to finish, making it less daunting and time consuming for most people. Additionally, refinancing gives you the opportunity to raise extra capital for home improvements, debt consolidation or deposit towards a
new purchase.

You should ideally start looking into refinancing 3-4 months prior to the product expiry date (expiry date detailed on the mortgage offer) to avoid going onto a standard variable rate. A typical re-mortgage application can take between 2-4 weeks to offer and 2-4 weeks for the solicitors to conduct searches and complete paperwork. These timeframes can fluctuate depending on individual circumstances.

What are the advantages of Refinancing?

One of the main advantages of refinancing is to obtain a better interest rate and reduce monthly payments. Very often as you work through your career you start to earn more and are more likely to stay on top of your finances and improve your overall credit score. Therefore you maybe in a better position to look at lower interest rate products. For borrowers with a perfect credit history and substantial income, refinancing can be a good way to convert a variable loan rate to a fixed rate. Another advantage of refinancing is having the opportunity to release equity from your home for additional cash.

What are the disadvantages of Refinancing?

If you are someone with less than perfect, or even bad credit, or too much debt, refinancing can be risky and difficult. Many mainstream lenders will not consider individuals with missed payments or adverse credit. However there are some less mainstream lenders with much higher interest rates who are more lenient with such scenarios. Other disadvantages are that refinancing can have additional fees such as lenders fee, valuation and broker fees, which may counter any of the benefits received from negotiating a lower rate.

Does refinancing hurt my credit score?

Many lenders use a ‘soft print’ when carrying out a credit search on your mortgage application, therefore it does not impact your credit score. A soft credit check is an initial look at certain information on your credit report. Nonetheless, numerous credit searches can leave a ‘hard print’ and contribute to a much bigger impact on your overall credit score. Most hard searches will stay on your credit report for around 12 months.

Author – Kira Heidari Mortgage Broker 09/11/18

Fundu Limited
2nd floor Flat
31 Lovat Lane
London
EC3R 8EB

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Fundu Limited is an Appointed Representative of Lanner Capital Limited which is Authorised and Regulated by the Financial Conduct Authority.

Mortgages can be very confusing things! The mortgage market in the UK is very competitive and there are a number of different types of mortgage product out there to choose from. I have outlined below some of the most popular options, with some pros and cons. Fixed Rate: The interest rate will remain the same, fixed, for a specified initial period, usually 2, 3, 5 or even 10 years. You can take the mortgage over a longer total term, 25 years for example, it just means that the interest rate will revert to the lenders Standard Variable Rate (SVR) once the fixed period is up, unless you change to a new product beforehand. We would recommend looking at options 3-4 months before the end of your current fixed rate. Pros: It could make it easier to budget for your monthly payments as you know what these will be each month during that initial period They offer you protection against any rate rises, either the Bank or England or the lenders SVR, during the fixed rate time Cons: If rates fall you wouldn͛t see any benefit There are usually early repayment charges if you wanted to redeem the mortgage during the fixed period, though most lenders allow you to make overpayments without penalty so there is still some flexibility You could find yourself paying a much higher monthly payment at the end of the fixed period as lenders SVR͛s tend to be a fair bit higher than most other products on offer Trackers: Another in demand product is the tracker mortgage. This has been popular due to the low Bank of England base rate we have seen for the last few years. The lender will specify a rate which is above the base rate (or sometimes this might be Libor rate instead), for example 1% over Bank of England base rate which would give you a total rate payable of 1.5% when the base rate is 0.5%. Trackers usually have a short period like the fixed rates above, but some lenders also offer lifetime trackers for the whole mortgage period. Pros: If the tracked rate falls, so does your total interest and therefore your monthly payment Rates could be slightly lower than fixed options Cons: If the tracked rate increases, so does your total interest and therefore your monthly payment!

There may be early repayment charges if you have a 2, 3 or 5 year tracker and want to redeem the mortgage within that period Variable Rate / Standard Variable Rate: This is an interest rate set by the lender themselves which they can change at any time. They do need to give their customers notice of any change in the rate, but they can make these changes as and when they want to. Pros: No tie in period so you can overpay or redeem in full whenever you want to without penalty There is no need to change products every 2, 3 or 5 years if you don͛t want to Cons: There is no certainty of what your monthly payments will be from month to month. In times of financial and economic uncertainty lenders may change their variable rate often as seen in the past Discounted Rate: This is a percentage discounted off the lenders Standard Variable Rate. Usually the discount is set for a period of time, usually 2 or 3 years. Pros: Lower initial interest rate compared to the lenders normal SVR You would see a reduction in rate and repayments if the lender reduces their SVR Cons: The lender can also increase their SVR at anytime resulting in your rate also increasing Often there are early repayment charges within the discounted rate period There could be a large increase in your monthly payment at the end of the discounted period when the mortgage reverts to the normal SVR rate, especially if the discount was quite generous, unless you switch to a new product Capped Rate / Cap and Collar Rate: This is similar to the Standard Variable Mortgage with one added element of having a maximum (Capped) rate you will be charged, and in some cases also a minimum (Collar). Pros: You will still see the benefit of any reductions in the lenders SVR, up until it reaches the collar if applicable Having the added certainty that your rate will not go above a certain level

Cons: The cap is usually set quite high so you may be paying a premium for no real benefit Your monthly payment can still increase if the lender changes their SVR Offset Mortgage: An offset mortgage works by linking a savings and/or current account to your mortgage account and you will only be paying interest on the difference. For example, if you have a mortgage of £100,000 and £20,000 in your savings account, then you will only be paying interest on £80,000. You can have an offset mortgage with a choice of any of the above-mentioned products so you could take a 2 year fixed or lifetime tracker with an offset. Pros: Possibility of lowering monthly payments or the overall term of the mortgage by utilising the offset facility Any funds in the offset account can be taken out again if needed, though that would then impact the monthly payment Cons: You need to be quite disciplined in using the offset facility to see the most benefit. Not good to dip in and out of the savings account! Meaning of interest –͞money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt͟ – influenced by medieval Latin interesse ͚compensation for a debtor’s defaulting

A Decision in Principle (DIP) may also be referred to as a ‘Mortgage Promise’ or an ‘Agreement in Principle’ (AIP). This is basically a certificate from a lender, stating what you may be able to borrow an amount based on credit history and financial health.However, this is not guaranteed and is subject to satisfactory evidence of income, outgoings and property value.

DIPs are carried out by a lender prior to an application being made. The information provided allows the lender to check the credit file and establish whether they can provide a prospective borrower a mortgage and the amount they are able to lend.

DIPs can be very usefully when trying to establish the amount you can lend and the type of house you are able to afford. Some estate agents like to see a valid DIP prior to an offer being made, as evidence that you are able to obtain a mortgage and afford the house you wish to buy.

A Decision in Principle is submitted prior to a full application. It is free of charge and a decision can be immediate, however sometimes lenders may require further information and in these cases it may take up to 24 hours to get a decision. Most lenders require three years of address history and details of all income and outgoings. DIPs are usually valid for up to 90 days.

Decision in Principle Pros

• It shows that in theory you can afford to buy a property.
• It could give you added reassurance around your borrowing prospects.
• Some estate agents prefer buyers who can provide a DIP upon offering on a house.

Decision in Principle cons

• A DIP is not a guarantee, upon a full application the lender will look at earnings and credit history in more detail and could decide not to lend at all.
• Most DIPs leave a soft footprint on your credit file, however if numerous DIPs are applied for it could affect your credit rating

A DIP is not a guarantee. You need to make a full mortgage application to confirm the amount you can borrow.

Here at FundU we can help make the DIP process as simple as possible..