Mortgaging a home is always nerve-wracking. It can be both stressful and exciting. After all, you are purchasing a home. To make your mortgage experience the best it can be, you need to take all the necessary precautions and be mindful of your tasks. However much money you have for the down payment and whatever you pay monthly, you should check off boxes before you can refinance your mortgage. Otherwise you might end up falling behind. Below are a few things to consider before refinancing a mortgage in the UK.
Why to Refinance
Mortgage refinance is similar to debt consolidation. Using a mortgage repayment calculator, you can identify that your mortgage has become a disadvantage, you can take out a different one to pay off the first and establish better terms that suit you. The three biggest reasons to refinance are access to cash flow, improved credit ratings, changes in your interest rate, and more.
Standard Variable Rates
The Bank of England’s interest rates are at record lows, and many people are looking to take advantage of them. Pensioners and the average family are looking to refinance their mortgages and take advantage of the low monthly payments. However, it could be more costly in the long-run. The first thing that you need to consider is standard variable rate (SVR).
The SVR is probably the preferred mortgage vehicle for most providers. It allows borrowers to set their own rates. Adjustments to the rate can be independent of the BOE interest rate. Banks typically charge a low application fees and don’t impose repayment penalties. This is to encourage borrowers to take advantage of this type of mortgage.
Another mortgage that you might want to refinance are tracker mortgages. These interest rates fluctuate with the Bank of England’s base rate. There is also an add-on interest rate of around one percent. A tracker’s mortgage has an interest rate and monthly payments will fluctuate within a narrow range relative to the prevailing rates. Since you’re dependent upon the Bank, if their rates stay low the tracker mortgages can be a bargain. The profit margin can be constrained but providers don’t impose high penalties for early payoff or refinancing by the borrower.
The UK offers fixed rate mortgages that are generally limited to terms of 2, 3, and 5 years. At the end of the period the loan is converted to the provider’s standard variable rate. Though the borrower will have the option to refinance again, it would have to be with another fixed mortgage, new terms agreement with the provider, or with a new one that offers more advantageous terms.
While this may sound like a great option, the problem is that it is virtually impossible to know what the prevailing rate will be. Crunching the numbers is necessary and refinancing the short-term fixed rates will lower your monthly payments. There are sometimes early repayment penalties applied, which could eliminate the money you save.
Structured like a SVR mortgage but at a discount from the provider’s standard interest rate. These mortgages typically run from 2-3 years, but longer mortgages can be negotiated. Fees to apply are low but early repayment will often lead to penalties. The borrower is gambling on the future of the interest rate. The provider’s historical exercise of discretion in setting the premium over and above BOR interest rates. It would be ideal to obtain a successive fixed rate. It is unlikely that providers will be motivated to agree because these are less profitable for them.
There are many mortgages you could refinance, but it is best to consider which one you have taken out and what the best option would be for you. Taking your time to learn the conditions and figuring out what the best move is for you and your situation. Refinancing can be a great option to make your borrowing more advantageous, but you should put in the work and figure out what the best strategy is for you and your family.