Mortgage Refinancing – Pros and Cons: Can Someone with Adverse Credit Reduce Mortgage Repayments?

The end of a mortgage term allows a homeowner to consider mortgage refinancing. A fixed-rate mortgage, tracker mortgage or discounted mortgage can help to reduce mortgage repayments, even if an adverse credit history exists. It is not sensible to consider mortgage refinancing before the end of the mortgage term as this incurs an early redemption penalty. Some homeowners utilise the services of a mortgage broker to trawl the market, but this does increase the associated mortgage fees.

Advantages of Mortgage Refinancing

  • Lower mortgage repayments. Homeowners that aren’t tied-in can reduce their mortgage repayments, even after mortgage fees have been taken into account. A homeowner that obtained a mortgage when they had adverse credit is likely to benefit most from mortgage refinancing;
  • Stability. Many families on fixed incomes find that tracker mortgages and standard variable rate mortgages compromise their financial stability. Whilst falls in interest rates help family finances, many homeowners prefer the security of fixed mortgage repayments;
  • Consolidate personal debt. Mortgage refinancing allows homeowners to consolidate personal debt and pay all their debt with a single mortgage repayment. This can help to minimise interest payments and simplify family finances;
  • Home improvements. Families often choose mortgage refinancing in order to pay for home improvements, such as a loft conversion or a new kitchen. This can help to increase home equity as it adds to the value of the family home;
  • Offset mortgages. Homeowners with personal savings can offset their savings against interest payments on their mortgage. This type of mortgage refinancing can help a homeowner to reduce mortgage repayments.

Disadvantages of Mortgage Refinancing

  • Adverse credit. Homeowners that took out their mortgage prior to adverse credit may be better-off staying on standard variable rate. Mortgage refinancing can become more expensive as adverse credit customers present a greater risk to the lender;
  • Mortgage fees. Mortgage refinancing incurs a number of mortgage fees. These include arrangement fees, valuation fees, broker fees as well as mortgage indemnity premiums. These mortgage fees can add thousands of pounds to the outstanding amount owed and minimise any savings achieved on monthly mortgage repayments;
  • Early redemption penalty. In order to benefit from lower mortgage repayments, homeowners are tied-in for a period of time. Should someone wish to proceed with mortgage refinancing, they will normally have to pay a hefty early redemption penalty;
  • Complexity. Mortgage refinancing isn’t simple and involves assessing a number of factors before proceeding. Whilst a mortgage broker simplifies the process, their service increases the mortgage fees. Most brokers charge homeowners 1 per cent of the mortgage value;
  • Home equity. Unless home equity is available, mortgage refinancing is unlikely to be possible. This is especially true now that the Financial Services Authority (FSA) has changed the rules in-light of the recent collapse in property prices.

The majority of homeowners can benefit from mortgage refinancing at the end of the mortgage term. Mortgage refinancing helps families to reduce mortgage repayments, provided they aren’t already tied-in. Entering a new arrangement before the current one has ended will incur an early redemption penalty. Homeowners with adverse credit should get a few exploratory quotes before mortgage refinancing.

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