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

Providers pretty much require the same information on a mortgage application, however each application form differs in layout and questions asked. Here is a brief summary of what is typically asked on a general mortgage application form

• Type of loan
• Amount required
• Repayment type
• Type of loan – purchase, remortgage, buy to let
• Current mortgage details if applicable, amount outstanding, term, provider

• Full names
• Date of birth
• Marital status
• Nationality
• Last 3 years address details
• Current residential Status
• Contact details

• Details of all credit cards or loans, amount outstanding and monthly payments
• Details of all income sources
• Occupation
• Details of current employer or self employed details, including address details, type of business and length of employment
• Retirement Age
• Details of any regular financial commitments, childcare etc.
• Details of any financial dependants
• Anticipated Circumstances

• Have you ever had arrears of greater than one month on any mortgage or loan?
• Have you ever been bankrupt?
• Have you ever had a judgement for debt, or any default recorded against you or a company in which you hold/held at least 15%?
• Have you ever entered into a voluntary arrangement with creditors?
• Have you ever been refused a mortgage or any other bad credit?
• Have you ever been convicted of (or have prosecutions pending relating to) acts of dishonesty, such as theft or fraud?
• Are you currently applying for any other mortgage(s), loan(s) or credit?
• Are you a guarantor for any other loans?

• Purchase price
• Full address
• Whether leasehold or freehold and full details
• Property type, number of rooms and parking type
• If a flat number of floors in the block, and floor of the property to be mortgaged.

• Solicitors details if free legals are not being used. If using own Solicitors then they need to be on the lenders panel.
• Account details if self employed
• Estate Agents details, which may be required for the provider to gain entry to value the property.

Required Mortgage Documents

Applying for a mortgage can be rather daunting whether this be a first mortgage or a re-mortgage. Below is a summary of the main documents which most providers require for a typical mortgage.

Signed mortgage application and declaration

Your mortgage adviser will usually submit the application online, however the provider will require sight of the signed and dated declaration.

Signed Direct Debit Mandate

This is not usually required until the offer has been accepted, however if this is produced at outset it will avoid any unnecessary delays.

Latest months full bank statement

This is used as proof of address and can also be used as proof of income. This must clearly show the applicants name and current address. One to be provided for each applicant.

Copy of current passport

Used as proof of ID and again it will be required for each applicant.

Proof of income

This is used as proof of employment status and level of income. There are different requirements for employed or self employed.

If you’re employed – copies of the latest three months payslips. However. If you have been employed less than three months then a copy of the contract or employers letter will suffice.

If you’re self employed – copies of the last three years SA302 and tax calculations, if you have been self employed for less than three months then an accountants letter will suffice.Having these documents available and providing them to your mortgage adviser at outset will simplify and speed up the mortgage process, making it a much pleasanter experience.

However, depending on the complexity of the mortgage required the provider may request further supporting documentation throughout the mortgage process. Such as for further advances for home improvements you may be asked to provide building quotes.

Summary of typical purchase costs

Have you wondered how much it would cost to buy a house or flat? There are a number of upfront costs as well as the mortgage and ongoing costs like maintenance/upkeep of the property, insurances, council tax, etc. See below a list of the main fees/costs to bear in mind when looking at purchasing a property:

Deposit:

One of the largest costs you will have to think about is the deposit you are going to put towards the purchase. Most lenders will need at least 5-10% of the purchase price, however you may find more choice of lenders, products and competitive rates with 15% or more. Why not try our deposit calculator to see some examples of deposit sizes for different purchase prices?

Stamp Duty:

Another large fee is the stamp duty. This is a government tax paid on homes costing £125,001 or more. If this is not your only property, there is also now an additional 3% to be paid on top of the standard rates. Take a look at our calculator to find out what the stamp duty cost will be for the purchase price you are looking at.

Solicitor Fees:

You will need to instruct a solicitor/conveyancer to carry out all the legal work involved in purchasing a property. They will usually charge around £400-£1000 including VAT depending on the company you choose, and there will also be all the search and disbursement costs on top of this – expect total fees to be around £850-£1500. Some of these costs include things like local authority searches, land registry fees, bankruptcy searches, environmental searches and fund transfer fees.

Valuation / survey fees:

The mortgage lender will want to undertake a valuation on the property to assess the market value and security of the property to ensure they are happy to lend against it. Some lenders may offer this for free but others may charge anything from £150 upwards depending on the value of the property. This will be a very basic report carried out for the lenders purposes so may not identify any/all repairs or maintenance that might be needed. Because of this, you may want to arrange a more in-depth report like a homebuyers or structural report depending on the type and age of the property. This would cost around £250+ depending on the value of the property for a basic homebuyer report or £600+ for a structural report. Buying a property is most people’s largest transaction so it would be wise to ensure the property you are buying is in good order!

Mortgage Fees:

Some lenders may charge an application fee (around £100-£150) when you submit an application to them, though this is becoming less common.

Depending on the product you choose, there may be a product fee attached to it, usually £999 – £1999. Lenders quite often give you the option of adding this fee to the loan, but this would mean paying interest on that over the course of the mortgage term which could add quite a lot more to the initial cost!

As mentioned earlier, some lenders may charge a valuation fee and some mortgage advisors may charge a fee for arranging the mortgage for you.

Removal Costs:

Unless you know a man with a van and have some strong friends, or are starting out with very little furniture, you may need to pay for a removal company when you move into your new home. This could cost around £300-£600, though renting a van and calling on some good friends or family will reduce this!

Building Insurance:

If you are buying a freehold property (most houses will be on a freehold basis) then you are responsible for insuring the property, and lenders will insist on there being suitable insurance in place when the mortgage completes. You will need to bear in mind that you are responsible for the property on exchange of contracts even though you may not set the completion date for a week, even months, after so this is when you will need the insurance to start.

It may also be prudent to arrange contents insurance to cover your possessions and also to look into life, critical illness and income protection. These are certainly areas to discuss with your mortgage advisor.

These cover the upfront costs to consider when buying a property. You will also have ongoing costs when you have bought the property, for example council tax, utilities and any repairs needed. Also, if you are purchasing a leasehold property (most flats, and some houses, are on a leasehold basis) you will likely have an annual ground rent to pay as well as monthly service charge costs. If you are looking to purchase a leasehold property, it is definitely worth checking with the estate agent/seller about what these costs are so you can factor this in to your ongoing costs and affordability. You will also need to know what these figures are for the mortgage application as the lender will factor these costs into your affordability assessment.

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..