What is Mortgage Refinancing?
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Understanding Mortgage Refinancing
Need some extra cash? Want a lower mortgage rate? Looking to change your mortgage for something more flexible? If you answered yes to any of those questions, mortgage refinancing may be the answer.
The property finance experts at GPS Financial have put together this guide on mortgage refinancing.
If you’re considering refinancing, talk to one of our advisers. They are here to help!
What is Mortgage Refinancing?
Mortgage refinancing, also known as remortgaging, is something of a misnomer. Technically, you’re refinancing your home, not your mortgage.
Refinancing involves securing a brand-new mortgage and using it to pay off your old one. Once complete, your old mortgage is all paid off and you have a single monthly payment for the new one.
You can refinance both residential and commercial mortgages in much the same way, for the same reasons.
The benefits of Refinancing a Mortgage
The benefits of mortgage refinancing depend on why you’re doing it.
There are many reasons to shop around for a new deal, including:
Secure a lower interest rate
The most common reason to remortgage is to find a lower rate. If your current mortgage rate is significantly higher than what’s available now, you could save money over the term by refinancing your mortgage.
Shorten the mortgage term
If you have a longer mortgage term, say 35 years, to buy your first home or an investment property, you can reduce that and the interest you’ll pay over the term.
A shorter term would usually be far cheaper in terms of interest, so it can be a good reason to refinance.
Release equity
If you want to get cash, for example, to invest in a holiday home or buy-to-let property, mortgage refinancing can release equity from your property to use however you like. You can also refinance a mortgage to get cash out to pay off any debts you may have.
Refinancing to raise cash is frequently used by investors, as it’s another way of borrowing money. Once a project is complete and earning money, using equity to finance a new project provides access to finance.
Pay down some of the loan
Most mortgage contracts allow you to pay 10% of the balance within a year without incurring any early repayment charges. This can help you pay down your loan and reduce your term.
When to Refinance your Mortgage
There is no hard and fast rule about when to refinance your mortgage. Much will depend on why you’re doing it, for example…
- If interest rates are significantly lower than what you’re paying now, that’s a good time to refinance.
- If you want to change the rates or terms of your existing mortgage, that’s a good reason for mortgage refinancing.
- If you want or need to get cash, that’s as good a reason as any to refinance.
The best time to refinance your mortgage depends entirely on your situation, the reason you’re doing it, and any time constraints there may be.
If you’re currently paying a high rate or have a longer term than you want or what’s available, refinancing could save a lot of money. There’s no need to keep paying extra interest on your mortgage when it would be better in your pocket!
If there’s an investment opportunity coming up, mortgage refinancing can provide the capital to take advantage and secure your purchase.
If you have inherited or come into some money, refinancing your mortgage could allow you to lower your mortgage and access better deals.
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Giving you peace of mind while you sit back and let us do all the work for you while finding you the best deal for your financial situation.
How does Mortgage Refinancing work?
Mortgage refinancing works in the same way as getting your first mortgage. You’ll need to find a good deal, apply, and wait for the lender to agree the loan.
The steps for mortgage refinancing look a little like this:
Assess your financial situation
Before you apply, make sure you’re able to refinance your mortgage. You’ll need to pass affordability checks and prove you can afford the loan.
Consider:
- Your current financial situation and earnings
- Any debt outside of your mortgage
- Your credit history and credit score
- Employment history
- Home value and current mortgage amount
- Any equity currently within the property.
Take a good look at your current situation to make sure you can afford a new mortgage and would qualify for one if you applied.
Use a mortgage calculator or speak to a mortgage broker to give you an idea of how much you could borrow and at what rates.
Decide if Mortgage Refinancing is right for you
If you could qualify for a new mortgage, first consider whether it’s the right solution in your situation.
Is it the right option? Is it financially viable? Will it cost more than you’ll save in payments or mortgage interest? Are there cheaper alternatives? Would a product transfer work better for you?
Once you have decided mortgage refinancing is right for you, contact one of the experts at GPS Financial to help with the next steps.
Shop around for a mortgage
It’s important to shop around for mortgages as rates can vary. You can shop around yourself using comparison websites or go directly to lenders.
GPS Financial can also scour the mortgage market looking for the best deals on your behalf. We have access to a wide pool of lenders that specialise in refinancing commercial and residential mortgages.
Once you find a couple of affordable options from reputable lenders, get an agreement in principle to give you an idea of how much it will cost.
Apply for your mortgage
Once you have compared the market, selected the best mortgage for your situation and secured an agreement in principle, it’s time to apply.
If you’re still sure it’s the right solution, apply for your chosen mortgage. Alternatively, we can do it for you.
Either way, it’s best to only apply for one mortgage as it will involve a hard search on your credit report.
From that point on, the process will be the same as it was when you applied for your first mortgage.
That means paperwork, valuations, surveys, more paperwork, and waiting for the lender to agree to the loan.
GPS Financial can help with most of that. We’ll handle the paperwork, liaise with the lender and handle any queries they may have. We can’t make them work any faster though!
Speak To An Expert
Giving you peace of mind while you sit back and let us do all the work for you while finding you the best deal for your financial situation.
Types of Mortgage Refinancing
The four main types of mortgage refinancing reflect the key benefits we listed above. They are:
Rate and term Refinancing
Rate and term refinancing changes the mortgage rate and/or the loan term.
Mortgage rates have been on quite a journey over the past few years so this is a popular reason to refinance your mortgage.
If you want to pay less each month over a longer term or more each month over a shorter term, or access lower interest rates for your existing mortgage, mortgage refinancing can adjust the rates and terms and potentially give you big savings.
Cash-out Refinancing
Cash-out refinancing means borrowing on the current equity in the property. You apply for a larger mortgage than the one you currently have and use the cash however you like.
You can spend that money on anything. Another property, investments, a holiday home or something else entirely.
Cash-in Refinancing
Cash-in refinancing is the opposite of cash-out. You refinance the mortgage while adding a lump sum to reduce the total amount you borrow.
You can do this to reduce monthly repayments, the mortgage term, or both.
If your mortgage rate is higher than your savings rates, this can be a good use of any spare cash you have.
Consolidation Refinancing
Consolidation refinancing is where you get a new cash-out mortgage to pay off other debts.
This type of mortgage refinancing is popular because it can help make life more manageable. It can help reduce debt and give you a single monthly payment to manage rather than several.
What to consider before Refinancing your Mortgage
A mortgage is a serious financial commitment. You need to be sure it’s the right solution in the right situation.
Before you apply, we recommend taking the following into account:
Affordability
All mortgage applications involve affordability checks but they are only part of the picture.
Make sure you’re comfortable with the projected monthly payments and factor in potential variable rate rises during the term if you don’t opt for a fixed-rate mortgage.
Early repayment fees
Most mortgages allow early repayment once any introductory rate has finished.
We suggest checking the paperwork before applying for a new loan. Early repayment fees can wipe out any potential savings of a new mortgage.
Mortgage interest
Mortgage interest is often the reason for mortgage refinancing. Whether that’s to lower the rate or the amount paid over the term, it’s a prime consideration.
Remember, extending the loan term will often mean paying more interest over that time. Your monthly repayments may be lower but the amount you’ll pay overall will be higher.
Make sure you know how much you’ll be paying before switching.
Fees and costs
Most mortgages now come with arrangement fees and other charges for valuations and legal services.
Make sure you know exactly what fees are charged and how much. Higher fees can reduce the mortgage interest savings you’ll make, so calculate carefully and budget for these accordingly.
Mortgage Refinancing with GPS Financial
Mortgage refinancing is an excellent way to get cash, save money, or change mortgage terms to suit your circumstances and preferences.
But it’s not a decision to be taken lightly.
If you’re considering mortgage refinancing, it helps to work with experts who can offer trusted financial advice to suit your situation. Contact GPS Financial today and speak to one of our mortgage brokers to discuss refinancing your mortgage.
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