Refinancing Your Mortgage: When and How to Do It

Refinancing your mortgage (also known as remortgaging) can be a savvy financial move. But timing, the type of remortgage deal you choose, and costs should all be weighed up.

In this guide, you’ll discover everything you need to know about the remortgaging process. We’ll cover everything from why to refinance a mortgage to how to get your finances in good shape to get the best remortgage deal you can. Please note, the article is not intended as financial advice and we would suggest speaking to a mortgage advisor if you have further questions.

Assessing your current mortgage situation

When many people hear about the benefits of mortgage refinancing, they’re keen to dive right in. But taking a step back is important. As a first step, it’s key to understand your current mortgage in detail to make sure you’re actually getting a better deal by choosing to refinance.

For example, start by looking at the current interest rate you’re paying on your mortgage. Is it higher or lower than what's available in the market? If it’s higher, it might be a good time to think about remortgaging.

You may also be coming to the end of your initial fixed rate period, which means you could be put onto a higher rate of interest by your lender. 

Also, look at the length of time left on your loan. Is it worthwhile remortgaging from a timing perspective? With initial remortgage costs, you may find it’s not worth your while switching if you only have a few years left of your mortgage. 

If you haven’t got much time left on your current mortgage, any savings you make might not be offset by the costs you’ll need to pay to remortgage.

Next, consider how your financial situation has changed since you took out your original mortgage. Maybe your credit score has improved, or your home's value has increased. Both can put you in a good position if you want to remortgage.

Understanding the benefits of mortgage refinancing

Mortgage refinancing can offer many benefits, depending on what you’re hoping to achieve by making the change. Here are some of the possible advantages s of switching:

• Tapping into lower interest rates: Refinancing could mean lower interest rates, lower monthly payments and overall interest savings.
• Switching from a variable rate to a fixed-rate mortgage: If you want more predictability in your payments, switching to a fixed-rate option could mean your mortgage payments won’t change when overall interest rates do.
• Debt consolidation: Are you struggling with debts from credit cards and other loans? Refinancing offers a way to consolidate what you owe.
• Shortening the loan term: Switching to a mortgage with a shorter term could save you a lot in interest over time.
• Equity release: Similar to a cash-out refinance, an equity release allows you to access the equity tied up in your home. This can be used for home improvements or other costs for example.
• Adjusting your payment schedule: You remortgage to change your payment plan so that it makes better sense for your monthly budget.
• Porting your mortgage: If you're moving to a new home, you might be able to shift your current mortgage to the new property, potentially avoiding early repayment charges.

That said, it’s always important to take a close look at both the benefits and costs or risks of refinancing. Things like early repayment charges and additional fees should all be weighed in. If you’re unsure, consider checking in with a financial advisor.

Identifying the right time to refinance

Deciding when to refinance a mortgage can be as important as deciding whether to refinance your mortgage in the first place. Some factors include:

• The interest rate environment: In general, the best time to refinance is when current interest rates are below the rate you’re paying.
• Your credit score: If your credit score has improved since you took out your mortgage, you might qualify for better terms now.
• Your property’s worth: An increase in your property's value could mean a better loan-to-value ratio. This could help get you a better mortgage deal.

Evaluating your financial goals and objectives

Remortgaging is all about taking a long-term view of what lies ahead financially. 

There are plenty of goals you can have in mind. For example:

• Are you looking to reduce the total interest you pay out over the 10, 15 or even 20 years of your mortgage? 
• Would you like lower monthly payments for increased cash flow? 
• Is your goal to change the term of your loan, either shortening it to pay off your mortgage sooner or extending it for more manageable payments? 

Each of these goals will need a different refinancing strategy. 

Calculating the potential savings and costs

Most often, refinancing isn’t free. Which is why it’s key to ensure it’s financially worthwhile to go through the process. 

To check whether you should refinance, you’ll need to see whether the savings over the life of the new mortgage more than offset the upfront costs of making the switch. 

Here’s an example calculation. In this scenario, a homeowner can get a lower interest rate on their mortgage and wants to check if remortgaging would be worthwhile.

• Current mortgage amount: £200,000
• Current interest rate: 4%
• New interest rate after refinancing: 3%
• Remaining term of the loan: 20 years
• Refinancing costs (including fees): £3,000

Using a mortgage calculator, let's say their current monthly payment is £1,200. Meanwhile, with the new interest rate of 3%, the new monthly payment might be £1,100. Hurrah, a £100 saving per month! But before we can celebrate we need to take the refinancing cost into account to realise the true impact. With costs of £3,000, it would take 30 months (saving £100 per month) for the borrower to see the advantage of moving to a new rate!

In other words, it would take 30 months (or two and a half years) to recoup the costs of refinancing. This means that if this homeowner plans to stay in their home for more than two and a half years after refinancing, it could be a financially beneficial move. 

However, if they plan to sell or move before that time, they might not save money by refinancing.

Preparing your finances for the refinancing process

Want to get a great remortgage deal? It’s important to work on practising good financial habits in the months (and years) leading up to your remortgage application. 

Below are some of the key factors a lender will consider when you approach them to refinance:

• Your credit report : Lenders use information found in your credit report to make decisions so it’s important to regularly check your report for accuracy and address any errors. Make sure to pay all bills regularly and on time as well as getting yourself on the Electoral Roll.
• Your income stability: Lenders will want proof that you have a consistent and reliable income. They may need payslips and/or bank statements from you to check this.
• Your affordability: Lenders will look at payslips and recent bank statements to see if the remortgage is affordable according to your means. Before you start the remortgage process, it’s important to check whether it makes financial sense to your situation. 

Navigating the application and approval process

It can take a few weeks to go through the application process for mortgage refinancing. Here’s an overview of what to expect:

• Submitting your documents: Firstly, you'll need to gather and submit various documents like proof of income, employment verification, your current mortgage details and bank statements.
• Credit and property checks: Next, lenders will do credit checks and property appraisals.
• Offer: If everything is in order, the lender will make you an offer.

Want to make the process as easy and quick as possible for yourself as well as your lender? Some key mortgage refinancing application tips include:

• Make sure your details are correct throughout the process.
• Openly communicate with your lender about your financial situation.
• Make sure your credit report is correct and up to date and have any errors removed.

Reviewing and understanding the new loan terms

When a lender offers you a new mortgage, you might be tempted to sign and agree right away. However, reviewing and understanding the new loan terms properly is important before locking yourself in. 

Remember to carefully check interest rates, fees, penalty costs and other details that may only appear in the fine print. Also, do a break-even calculation so you know if the move is worthwhile.

FAQs about refinancing a mortgage

There are a few other commonly asked questions about refinancing a mortgage, so to help with all the information you may need, we’ve answered them below:

What's the difference between refinancing and remortgaging?

In the UK, refinancing and remortgaging are essentially the same thing. The term 'refinancing' is more commonly used in the US, whereas 'remortgaging' is the term predominantly used in the UK. 

Both mean replacing an existing mortgage with a new one, either with the same lender or a different one.

How many times can you refinance a mortgage in the UK?

There's no limit on how many times you can refinance (remortgage) a property in the UK. However, each time you do it, you'll most probably need to pay fees and charges. 

Frequent remortgaging may also impact your credit worthiness and lenders' willingness to offer you good terms.

Securing your best mortgage deal

Going through a successful UK mortgage refinancing process is straightforward, so long as you are clear about what you want to achieve and why. Done right, you might just make your financial life a whole lot easier.