Refinance loan before mortgage to improve affordability? Or complete madness?

TheFamousGrouse

In the next 2-3 months we're looking to purchase our first home. 

We've been through our finances with a fine toothed comb, have a deposit saved for 90% LTV and credit-wise we're ship shape: no missed payments, CCJs, etc. 

We've paid off a credit card and just have a loan outstanding which we took out early last year to buy a new car as our old one was uneconomical to repair. In an ideal world, I'd pay off the loan now but that just isn't feasible. 

At the time there weren't many good deals available on loans and unfortunately we made the stupid decision to accept one with a higher interest rate than we would normally be comfortable with.

I've now been offered a loan with a much lower interest rate which would slash our monthly payments over the same term remaining. 

We've been through affordability calculators and it appears we pass for affordability as we are, but we don't know whether we should refinance the loan now to save interest and in theory, reduce our monthly payments so we could possibly afford a bigger mortgage. 

My main concern is a hard check on my credit file within the current timeframe. There are no other checks on our files from the last 12 months. 

Am I barking mad for even considering this? 

TheSpectator

This close to a mortgage application it would be a foolish thing to do.

TheFamousGrouse

Thanks for your widsom @TheSpectator

I thought as much that it would be madness in the two or three months before a mortgage application, just needed someone to say as such! 

ACG

There is no hard and fast rule. If you are a borderline case, I would say hold off. But a credit check 2-3 months before a mortgage application, it should not be a deal breaker but there is a risk. 

TheFamousGrouse

ACG said:

There is no hard and fast rule. If you are a borderline case, I would say hold off. But a credit check 2-3 months before a mortgage application, it should not be a deal breaker but there is a risk. 

Thanks ACG. I'm not sure if we'd be a borderline case to be honest - would a borderline case be someone at the top of their affordability and/or more to do with past credit issues (we're 100% squeaky clean after checking our files with all three CRAs - not looking at the scores but the contents of our credit files)? But I suppose it's not that simple? 

Lowering the monthly payments on the loan would (according to the calculators) boost our affordability by another 10k or so which could be helpful in our local area, but again as you say there's always a risk with a credit check. 

ACG

There is more to it than the score you see. 

If you wanted to get a mortgage for 4.5x your income at 95% LTV, your deposit is gifted and you have been in your job for a week, then you are probably very borderline and I would say stick as you are. 

If you are at 75% LTV and you have saved your deposit, then I would say it might be worth the risk. 

I realise you are probably somewhere in the middle of those 2. I dont want to say you will be fine as I dont want you blaming me if it goes wrong. But I think in reality most people could probably do what you want to and it would not cause a problem, but I cant speak for you personally. 

TheFamousGrouse

ACG said:

There is more to it than the score you see. 

If you wanted to get a mortgage for 4.5x your income at 95% LTV, your deposit is gifted and you have been in your job for a week, then you are probably very borderline and I would say stick as you are. 

If you are at 75% LTV and you have saved your deposit, then I would say it might be worth the risk. 

I realise you are probably somewhere in the middle of those 2. I dont want to say you will be fine as I dont want you blaming me if it goes wrong. But I think in reality most people could probably do what you want to and it would not cause a problem, but I cant speak for you personally. 

Thanks again for your time and advice.

I appreciate what you're saying about being in between the two examples. 

For a bit more context: job situation is stable with 3+ years history, borrowing is about 4 to 4.25x income at 90% LTV unless we present a perfect case for a higher LTV, deposit is a mix of savings and some inheritance from my wife's granddad. As mentioned, credit files look clean: never even missed a payment and no other credit now other than the loan. No other hard searches on any of our records in the past 12 months. 

Sorry to drip feed information. I'm slowly learning the reality of mortgages can be a bit more complex than I first realised. 

I guess it would be a complete roll of the dice. 

ACG

If I were a betting man, I would say you should be fine. But again, I wouldnt want to sit here and say its a sure thing.