How To Refinance A UK Property – A Comprehensive Guide

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The traditional mortgage term in the UK has long hovered around 25 years, with many borrowers now seeking even longer arrangements, often extending to 30 years or more. However, borrowers are less likely to keep the same mortgage for the term of it. In this blog, we will go over everything you need to know about refinancing a property in the United Kingdom.

What is Refinancing Property?

Refinancing a property in the UK involves the act of substituting an existing mortgage or financing agreement with a fresh mortgage or financing arrangement. This financial practice is commonly employed to achieve specific financial goals, which can possibly include reducing monthly installments, securing a more favourable interest rate, unlocking equity, or altering the terms of the loan. This financial strategy is applicable to various types of properties, encompassing both residential and commercial real estate in the United Kingdom.

Lower monthly payments, quicker equity access for financial requirements, and better loan conditions are just a few advantages of refinancing. It is essential to carefully consider the costs, fees, and long-term impacts before refinancing a property. To evaluate if refinancing is the best financial move for their unique situation and aspirations, borrowers should consult closely with a mortgage broker or lender.

Understanding the Need for Refinancing

A typical residential mortgage typically begins with an initial fixed or discounted interest rate period, usually lasting two to five years. Following this time, the interest rate will fall back to the lender’s Standard Variable Rate (SVR), which might be significantly higher. If you took up a 25-year equity mortgage for £150,000 two years ago, with a two-year fixed rate of 1.5% and a lender’s SVR of 3.5%, your payments every month will climb by £149.07.

Such a sudden payment hike can be alarming, but refinancing can offer a solution. By remortgaging, you essentially start fresh with a new fixed or discounted rate period. In the example above, the borrower could secure a new 23-year mortgage for £150,000, clearing the previous mortgage and potentially enjoying reduced payments during the new rate period.

Given the historically low interest rates, if you’re nearing the end of your fixed or discounted rate period or have transitioned to the lender’s SVR, it’s an ideal time to explore refinancing options to secure a better deal.

How Does Refinancing a Bridging Loan Work?

Bridging loans can be refinanced by swapping out their short-term nature for a more conventional, long-term financing option, frequently a home mortgage. Through this procedure, debtors can change from a flimsy funding arrangement to a longer-term, more reliable loan. Here’s how refinancing a bridging loan typically works:

  • Initial Bridging Loan: The borrower first receives a bridging loan, which is a short-term financing option with a set period, typically ranging from 12 to 18 months. Bridging loans are frequently utilised in instances where a large amount of finance is required quickly, such as property purchases or renovations.
  • Creditworthiness and Documentation: To be eligible for refinancing, borrowers must meet the lender’s creditworthiness requirements. This process includes evaluating the credit history, borrower’s revenue,  and financial stability. The borrower must produce all relevant documentation, such as tax records, credit reports, and proof of income.
  • Property Purchase or Renovation: The bridging loan serves its purpose, such as facilitating the purchase of a property that requires renovation. Bridging loans are often chosen because they provide fast access to funds when traditional mortgage approval processes may take longer.
  • Prepare for Refinancing: While the property purchase or renovation project is underway, the borrower prepares to refinance the bridging loan. This involves applying for a new mortgage or financing arrangement that will replace the short-term bridging loan.
  • Property Valuation: The property behind the bridging loan frequently needs a new valuation or evaluation as part of the refinancing procedure. This evaluation aids in assessing the property’s current market value, which is necessary when applying for a new mortgage.
  • Lender Approval: To decide whether to approve the new mortgage, the lender evaluates the borrower’s application, creditworthiness, and property value. The lender will outline the new mortgage’s parameters, including the interest rate, loan length, and monthly payments, if it is authorized.
  • Loan Repayment: Following the approval of the new mortgage, the previous bridging loan will be fully repaid using the money from the new mortgage. This effectively settles the short-term debt.
  • Transition to Long-Term Mortgage: With the bridging loan repaid, the borrower transitions to the new long-term mortgage or financing arrangement. This new financing typically has a more extended loan term, often 25 to 30 years, making it a more sustainable option for the borrower.
  • Long-Term Repayment: The borrower makes regular monthly payments on the long-term mortgage, following the agreed-upon terms and interest rate. These payments are typically more manageable than the interest-only payments common with bridging loans.
  • Loan Application: For the refinancing arrangement, the borrower files a loan application to the selected lender. This application includes information about the new mortgage amount, loan period, and other pertinent financial data.

How to Raise Additional Funds Through Refinancing?

Many borrowers opt for a ‘like-for-like’ remortgage, where the new mortgage amount matches the outstanding balance on the previous mortgage. However, some choose to raise additional funds through refinancing. Here are common reasons for doing so:

  • Home Improvements: Extensive renovations or alterations to your property often require significant funds. Borrowing from a remortgage might be an economical option to fund such initiatives.
  • Raising a Deposit: Raising a Deposit: You might need money to put down for a second house, a buy-to-let property, or a first home for your family member. Saving the necessary sum through traditional means may not be feasible, making a remortgage a practical option.
  • Debt Consolidation: Refinancing can be an attractive option to consolidate higher-interest debt, such as credit card balances and personal loans. While a mortgage generally offers lower monthly payments, it’s crucial to proceed cautiously.

How Does Refinancing a Bridging Loan via a Mortgage Work?

Bridging loans are short-term financing solutions often repaid through refinancing with a standard residential mortgage. This strategy is frequently used by investors to finance property purchases or renovations when traditional mortgages are initially unavailable. For example, you might secure a bridging loan to purchase a property that needs substantial work. After completing the necessary renovations, you can repay the bridging loan by refinancing with a standard mortgage.

Refinancing as a UK Expat

If you’re a UK expatriate, there’s no reason to forgo refinancing when your fixed or discounted rate period ends. You can explore competitive mortgage deals and even raise additional funds for various purposes. However, certain considerations apply, making professional advice valuable.

  • Property Empty Status: If your property has been vacant, your insurance policy may have specific clauses regarding vacancy periods or return frequency.
  • Buy-to-Let Mortgages: A buy-to-let mortgage is required if you intend to rent out your property. Expatriates may face higher loan rates and a lower Loan-To-Value (LTV) ratio.

The Importance of Professional Advice in Refinancing?

When considering debt consolidation through a remortgage, it’s advisable to seek professional advice. Here’s why:

  • Debt that was unsecured may become secured against your home.
  • Extending the mortgage term may lead to higher total repayments over time.
  • Professional advice can help you determine the best approach, which may involve consolidating some debts while leaving others intact.

Find the Best Mortgage Offer

As a specialist mortgage broker, we possess comprehensive product knowledge across the mortgage market. FinSpace can help you secure the best mortgage offer available to you. Contact us to schedule an in-depth discussion with one of our trusted finance brokers and discover how we can assist you in refinancing your UK property to meet your financial goals.

If you want to find out more a service or How we can hel you get in touch our team.

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