Refinancing Your Mortgage: How Does It Work?

When your current mortgage deal comes to an end, such as at the end of a fixed-rate period, you will usually be automatically moved to your lender’s standard variable rate (SVR).

These rates can often be higher than the interest rates available on new mortgage deals, and refinancing can allow you to review your current mortgage to see whether there are any other deals better suited to your circumstances.

Refinancing your mortgage could help reduce your monthly repayments, change your mortgage terms or allow you to borrow more against your property.

In this article, we explain exactly what mortgage refinancing is, how the process works in practice and both the pros and cons you need to consider. Let’s begin.

What Is Mortgage Refinancing?

Refinancing effectively gives you a new mortgage agreement, and with this new agreement you can access new interest rates, product terms and repayment conditions.

Crucially, refinancing your mortgage is different from a product transfer, where you switch to a new deal with your current lender without replacing the mortgage, or porting, where you take your existing mortgage deal with you when moving home.

This distinction is important because refinancing involves applying for a new mortgage with a new lender. As such, the new lender will need to assess your income, affordability, credit history and property before deciding whether to approve your application.

As such, refinancing can offer homeowners much more than just the opportunity to change their mortgage rate. Ultimately, you are reviewing your existing borrowing and arranging new mortgage terms, which can affect your monthly repayments, overall mortgage costs and how long you have left to repay the loan.

How to Refinance a Mortgage: Step-by-Step

1. Contact a Mortgage Broker

The first step is to speak with a mortgage broker about your current mortgage and what you would like to achieve by refinancing. A mortgage broker will be able to review your current mortgage, discuss the options available and highlight any potential issues before searching for a new deal.

2. Send Your Income Documents

As refinancing involves a new lender, you will typically need to provide documents that allow both the broker and lender to verify your income and financial circumstances. The exact documentation you need to show proof of income will depend on how you earn your income, but generally this will include a combination of payslips, bank statements, accounts or tax documents.

3. Your Broker Researches the Market

Your broker can then compare available mortgage products against your circumstances and requirements. This includes evaluating different interest rates, product terms, product fees, early repayment charges and the overall cost of the mortgage.

4. Obtain an Agreement in Principle

Once a suitable lender has been found, you may obtain a mortgage agreement in principle (AIP). This provides an initial indication of whether the lender may be prepared to lend the amount required to cover the refinance. AIPs are subject to a full application and further checks.

5. Submit the Full Mortgage Application

Your broker will then submit your new mortgage application to your chosen lender, along with any additional information or supporting documents that are required. The lender will then begin its formal assessment.

6. Property Valuation

The lender will need to establish the value of your property. Depending on the lender and property, this may be completed through an automated or desktop valuation rather than requiring a physical visit from a valuer.

7. Underwriter Review

The lender will review your application against their criteria, checking your income, affordability, credit history and supporting documents. In the case that any further information is required, they will usually request this before making a decision.

8. Receive Your Mortgage Offer

If your mortgage application is approved, the lender will issue a formal mortgage offer confirming how much they are willing to lend and the terms of your new mortgage.

9. Complete the Legal Work

A solicitor or conveyancer completes the legal work required to replace the existing mortgage. This includes arranging for your current lender to be repaid and registering the new lender’s charge against the property.

10. Completion

On the completion date, the funds from your new mortgage are transferred to repay your previous lender and close your old mortgage. Your new mortgage will then take effect, completing the refinancing process.

How Long Does It Take to Refinance a Mortgage?

As there are several parties involved, even small delays can affect how quickly your application progresses. This includes how organised you are at providing the required documents, how efficiently your mortgage broker manages the application and how long the lender and property valuer need to complete their checks.

Some parts of the process can now also be completed automatically, which can make straightforward applications considerably quicker. Certain lenders can use Open Banking to verify your income instantly, while your property may qualify for an automated valuation rather than requiring a physical inspection.

As a result, applications that clearly meet the lender’s criteria could progress to a mortgage offer very quickly. Whereas, more complex cases that require additional documentation or a physical property valuation, will naturally take longer to assess before an offer can be issued.

What Are the Pros and Cons of Refinancing?

While refinancing your mortgage can offer a host of different benefits and opportunities, it is also important to compare the total cost against the overall gain.

For example, a lower interest rate may look very attractive, but if you have to pay early repayment charges in order to switch to a lower rate, the actual savings could turn out to be much smaller than you initially expect.

For example, on a £200,000 repayment mortgage with 25 years remaining:

• Current Mortgage: 5% SVR = £1,228 per month
• New Refinance Deal: 2% fixed rate = £1,078 per month
• Monthly Difference: £150 (£1,800 over 12 months)
• Upfront Costs: £999 arrangement fee + £300 valuation fee = £1,299

In this example, the reduction in monthly repayments would amount to approximately £1,800 over the first 12 months. After accounting for the £1,299 in upfront costs, that would leave a net first-year saving of approximately £501.

Of course, the potential savings are only one part of the decision. The table below summarises the main advantages and disadvantages of refinancing your mortgage:

The most common reason that homeowners choose to refinance is to access a deal that is now much more suitable than their previous mortgage. This usually is linked to saving money through a lower interest rate or changing the terms of your mortgage.

With that said, it is important to consider the available products and interest rates that are now available. Depending on when your mortgage was completed, your previous deal may have been secured at a time where rates were lower. In these cases, refinancing will not necessarily mean that you will be able to secure a better rate than you currently have.

A top tip is to compare between the new deals available when you refinance and the alternatives available from your existing lender.

Refinancing can also allow you to increase your borrowing, provided you have enough equity in your property and can afford the additional mortgage. As you repay your mortgage over time, you will usually build equity in your home, which may give you greater scope to borrow against it when refinancing.

This could allow you to raise money for home improvements or consolidate existing debts, however, it’s important to note that borrowing more will increase your mortgage balance and could increase the total amount of interest you pay.

There are also costs to factor into the decision. Refinancing before your current deal expires could result in an early repayment charge (ERC), while arrangement fees and legal costs may apply to the new mortgage.

Finally, refinancing means completing a new mortgage application with another lender. As such, you will need to meet their current affordability and lending criteria, and there is no guarantee that your application will be accepted.

Whether refinancing will leave you better off depends on your existing mortgage and the deals available when you apply. For this reason, speaking with a mortgage broker can help you compare your options and understand the overall cost before proceeding with a full application.

When Is the Best Time to Refinance?

Starting six months before your deal ends can provide you with all the time you and your broker will need to compare the different mortgages available and complete the application process without the need to rush.

It’s important to note that the length of time your mortgage offer lasts will vary between lenders and products. As such, six months should be used as a helpful starting point rather than an absolute deadline.

A mortgage broker can always help check how long a particular offer will last and can plan your new mortgage application around the end date of your current deal.

Can I Refinance a Mortgage With Bad Credit?

“Bad credit” is an umbrella term that could cover anything from missed or late payments through to defaults, County Court Judgments (CCJs) and other more serious credit problems. For this reason, there is no absolute answer as to how adverse credit will affect your refinancing options.

In practice, lenders will consider your individual circumstances when you apply. This will naturally include the type of credit issue, how much was involved, when it occurred and whether or not it has since been resolved. Additionally, your income, existing debts, affordability and the amount of equity you hold in your property can also affect which lenders and deals may be available.

Having bad credit does not automatically prevent you from refinancing. Depending on the type and amount of adverse credit, you may have access to fewer lenders, products, and the interest rates available could be higher.

If you are unsure how to refinance a mortgage with bad credit, working with a mortgage broker can help you identify which lenders are most likely to consider applications from borrowers with bad credit.

Can I Refinance My Mortgage With the Same Lender?

A product transfer can be a much simpler process than refinancing with a different lender. This is mainly because you will not usually need to complete the same affordability checks or legal work required when choosing to refinance with a new lender.

With that said, choosing the simplest option does not mean that you will secure the mortgage that is most suitable for you.

Before choosing to switch mortgage deals with your current lender, it is worth comparing the wider market and evaluating all of the options that are available to you. For example, another lender may be willing to offer a more competitive interest rate, lower fees or mortgage terms that are simply better suited to your circumstances.

Your future plans and property goals are also important. You may want to increase your borrowing, change the mortgage term or move home during your next deal. Your existing lender may not be able to make a competitive deal for what you want to do next.

Comparing both routes and understanding all of your options can help you understand whether staying with your lender or refinancing elsewhere will offer you the better value overall.

How Can a Dedicated Mortgage Broker Help?

A quick glance at a lower interest rate might immediately catch your attention, but it doesn’t necessarily mean that you will be saving money by refinancing. A mortgage broker can help you look at the full picture, evaluating product fees, early repayment charges and mortgage terms to identify which options could offer the best value overall.

At Boon Brokers, our expert advisers have whole-of-market access to more than 90 lenders and thousands of different mortgage products. We can compare your refinancing with all the options available from your existing lender and the wider market, to ensure you get the mortgage that matches your needs.

You will be assigned a dedicated broker who will manage your case from start to finish. This includes managing your application, communicating with the different lenders and keeping you informed every step of the way.

Our mortgage advice is completely fee-free, meaning you do not need to worry about paying us a broker fee for our advice or for arranging your new mortgage. We are here to help you find a refinancing deal that works for you.