Remortgaging can reduce your monthly payments and allow you to pay off your mortgage sooner.
But does it affect your credit score? If so, how?
We take a detailed look at how you will be financially affected if you decide to swap your current mortgage servicer.
What is a mortgage transfer?
Put simply, a mortgage transfer is when you transfer the balance on your current mortgage to a new deal or new provider.
Does a mortgage affect credit?
Yes, a mortgage loan transfer will show as a new loan on your credit report. This will affect your credit score because you’re basically paying off one loan to open a new one (with a different provider).
What is a credit score?
A credit score is a 3-digit number that rates your credit risk ranging from 300 (Very Poor) to 850 (Excellent). It helps lenders to decide on whether to give you credit and it can also determine the terms of the loan servicer and also the interest rate charged. Having a high score can make it easier to obtain a loan and have more preferential terms on interest rates.
Your score is calculated by credit companies by using information contained in your credit report. The information held includes:
• Amount of outstanding balances on loan or credit agreements
• Your mortgage payment history
• Your length of credit history
• The types of credit accounts you have (car loans, mortgages, credit cards for example)
• Details of applications for new credit accounts
You must ensure that your credit report is accurate and up to date. This ensures that your score will be accurate and up to date also. A credit agency does not calculate your score. Different lenders or companies have their own credit scoring systems that then calculate your score based on the information on your credit file.
If you want to obtain a copy of your credit score, your credit card provider may give your score to you for free. You can also buy your credit report from three major credit agencies. When you receive it, there will usually be information to go with it giving you hints and tips on how to improve it.
Ways that a mortgage transfer could negatively affect your financial situation
Opening a new line of credit
New lines of credit also negatively impact your credit report more than a loan that you’ve been paying for a number of years.
If you have too many lines of credit open, it could also hurt your credit score because it makes your financial situation look too risky to potential lenders as you would have to manage a lot of monthly repayments.
Having multiple credit inquiries on your credit report
When you want to refinance your mortgage, it’s advised that you shop around for the best deal. However, every time you apply for a loan and the mortgage servicer looks at your credit history, this will show as a hard inquiry on your credit report. On an Equifax credit report, a hard inquiry will stay on your file for up to two years and may lower your score. Where possible, research providers and rates online before making a short list of the best options for your personal circumstances.
Missing mortgage repayments during refinancing
Completing a mortgage transfer can be a long process. Some borrowers have missed payments by wrongly assuming that their refinancing had gone through and was completed.
A late or missed mortgage repayment can significantly harm your credit score. This is because your report is used to demonstrate how reliable you are with money and repayments. If your report shows a history of missed or late payments, it’s unlikely that new lenders would consider lending money to you. Late mortgage payments may also suggest that you’re struggling to manage your finances.
Late or missed payments could stay on your credit history file for up to six years, so It’s important to keep on top of future payments.
Closing an account
Sometimes, it can take a while for an old mortgage account to stop showing as active on your equifax credit report. This can sometimes cause a dip in your score when a new account is opened and added to your records.
In addition to affecting your credit score, it’s important to consider that your current lender may charge you fees for transferring your mortgage to a new provider.
Reasons why people consider a mortgage transfer
There are lots of reasons why people decide to remortgage, including:
1. To switch to a better rate – finding a lender that can offer you a better rate can potentially save you a lot of money, especially if your loan amount has a very high balance.
However, switching to a new lender can involve paying a small exit fee to your current lender or you could be faced with an early repayment charge on your existing loan which could be as much as 5%. These charges may still be worth paying if the savings on your new deal are high enough.
2. If a current mortgage deal is ending – tracker, fixed-rate or discount mortgages usually have a term of two to five years before it changes to the lender’s standard variable rate or SVR. The standard variable rate can be a higher interest rate and can cost thousands more dollars over time. It is advised to begin looking for cheaper mortgages around 16 weeks before your current one ends to avoid being switched to the standard variable rate option.
To borrow money on an existing mortgage – if you are in a situation where you would like to make upgrades to your home, pay off other debts or pay for repairs, you could consider releasing some equity in your home. Your current lender may have said no to borrowing more money so by switching mortgages, it may be possible to release equity at a lower rate. It is likely that you will need to provide evidence for the equity release as new lenders will want to know what the money is to be used for.
3. To change mortgage type from an interest-only deal to a capital repayment – you may be considering switching from a repayment mortgage to an interest-only loan. If this is the case, your current lender won’t need to remortgage you as they should be able to make the switch for you.
It can be more difficult to change from a capital repayment loan to an interest-only mortgage but you may have the option to keep part of your balance as interest-only and to move the rest of it to a capital repayment loan.
4. To gain more flexibility – there are also mortgages that can give you more flexibility with payment options, including a payment holiday. This can be useful if you are traveling, changing jobs or studying.
There are also offset mortgages that combine your mortgage loan with your savings or current account.
There are a variety of mortgage options out there so finding one that’s right for you should be easy enough. Bear in mind that having a mortgage with additional flexibility may end up costing you more in the long run so only choose options that work for you.
What happens if a lender needs to transfer your mortgage?
If a bank or mortgage provider goes bust, it’s likely that your outstanding mortgage will be sold to another bank that will take over the debt. Your repayments will stay the same.
In this situation, you won’t be charged any fees and your credit score won’t be affected.
The dos and don’t of remortgaging your property
Let’s end with some top tips on how to avoid costly mistakes during the remortgage process.
· Research the market six months ahead of when you plan to remortgage your house. This will allow you to secure the most competitive rate and prevents you from choosing a variable late at short notice.
· Gather all your paperwork so it’s ready for the remortgage process. ID, proof of address and income and bank statements will all be required.
· Carefully consider your options. The best mortgage rate for you might not be the one with the lowest monthly payments. Consider ones that enable you to pay off your mortgage quicker, saving you money in the long term.
· Choose the easy option and stick with your current lender. Remortgage options come up all the time with different lenders. Saving money or paying your mortgage off sooner is worth the extra paperwork.
· Guess how much your property is worth. The housing market is changing all of the time and an accurate valuation is key to knowing how much you can afford and save on a new mortgage.
· Forget about the fees. There may be termination fees with your current lender, which is typically a percentage of the time left on your fixed contract. There are also set-up fees from your new mortgage to consider before deciding whether remortgaging is a good financial move for you.
Other factors that can affect your credit score
It’s not just mortgage transfers, late payments and too many lines of credit that can reduce the likelihood of you getting accepted for future credit. Maintain a healthy credit score by avoiding the following behaviors as much as possible.
· Staying close to your credit limit – maxing out your credit card or loan allowance can cause lenders to think that you rely too much on your credit and are in financial difficulty.
· Regularly applying for credit – it’s not wise to apply for mortgage transfer deals too often. Even if the application is not successful, it will still show on your report as trying to apply for credit.
· Not having a credit history can be just as damaging as having a bad credit report. Lenders need to know that they can trust you to pay back the money that you borrow. The only way to gain that trust is to prove you’ve done it before or are already doing it.
How to improve your credit score if it drops
If you need to boost your credit score to apply for a new mortgage transfer rate, there are ways to quickly bring it back up to where it needs to be.
Give these credit-boosting tips a go.
1. Ask your credit card provider for a higher credit limit
Whilst you may think that this will be detrimental to your score, it actually demonstrates to lenders that you can manage your money effectively. Just don’t go maxing out your new limit.
2. Dispute any credit report errors
It’s important to regularly check your credit reports and identify any mistakes that may be pulling your score down. The three main credit bureaus can provide free reports so that you can check for errors and dispute them. Examples of errors include payments marked as late even though you paid on time and someone else’s credit activity showing on your account in error.
3. Pay more than just the minimum repayments
If you have the spare cash, paying more than just the monthly minimum payments will keep your revolving debt down. Paying off the balance in full will have the biggest positive impact on your credit score but you should only pay what you can afford.
4. Link your utility and cell phone bills to your credit report
Experian provides an easy and free-of-charge way to improve credit scores. You can choose to have your bank account linked to your credit history file. This shows your payment history and is another way to demonstrate that you can make payments on time and in full.
Mortgage transfers and credit scores
It is always a good idea to look into the costs of a remortgage especially if you have a low credit score since you would be likely to be offered a higher interest rate by a new lender.
Want to know more about homeownership and how to manage your finances. Visit the homeownership section on our blog, designed to help people take back control of their money.