The reasons why you might remortgage your home.
To do it or not to do it… remortgaging is a topic that ties lots of people in knots. Very often, it seems far easier option to stick with the mortgage you’ve got now. Unfortunately, that can mean you pay more in interest. That could cost you thousands over the life of your mortgage. In fact, many lenders rely on that sense of apathy to make more cash from us. You can hardly blame them. However, it does mean you are worse off in the end.
So, why should you remortgage? Here are some of the main reasons you might consider doing it. As you will see, they all involve changing your financial position. Yet while some people switch products simply to save money on a better deal, others do so for other financial reasons. Have you asked yourself any of the following questions recently?
Should I remortgage to pay off debts?
Debts can mount up quickly if you’re not careful. Credit card debts, store card debts, loan debts… it all adds up.
While many people have a debt in the form of a mortgage, this is viewed as an acceptable form of debt. Without a home loan, you wouldn’t be able to get the property you wanted. However, other debts – such as the ones mentioned above – often cause people a lot of worry. In some cases, people end up only making the minimum payment each month. This means they end up with the original debt in place that doesn’t reduce over time.
If you are in this situation, you may wonder about remortgaging your property to free up some cash to pay off all your debts. This is an option, but it isn’t one you should enter in to lightly. Before you do anything else, you should check how much you owe and whether there are other options you could use for raising money to pay off the debt. For example, you could get a 0% balance transfer for two years, giving you that time to clear your credit card debt with no interest payable.
If your purpose for remortgaging is to borrow more cash, you must do your sums to see if this option makes financial sense. Read on to find out how to do this. If you use a good mortgage broker, they will also advise you on your best way forward and will help advise you on the most cost effective ways to clear your debts. For example, you may have a car loan that finishes in 6 months’ time, it wouldn’t make sense to clear this and add it onto a 20 year mortgage term if you can avoid / afford not to do so.
Should I remortgage or get a loan?
This is an important question to explore. There are three elements to consider when comparing an unsecured loan to a home advance:
How do the interest rates compare?
How much will you pay in interest over the life of the product?
How long will the loan last for?
You cannot figure out whether one is cheaper than the other until you have crunched all the numbers. If you added debts of, say, £10,000 onto your mortgage and carried on paying the usual monthly repayment, you may well end up paying more in interest than if you’d taken out a personal loan. Hence why it matters to get as much information and figures at your disposal prior to making any decision about your financial situation.
Should I remortgage to consolidate debt?
Debt consolidation is different to paying off your debts. As you are consolidating them into one lump sum rather than clearing each debt. This can mean you pay less in interest, thereby making those debts easier to manage and to pay off.
It’s important, however, to realise that debt consolidation and paying off debt is going to amount to the same thing if you are remortgaging to repay your debts. In the end, the amount is going to be added onto the loan you have on your home, so you are shifting the amount you owe from one product to another. You shouldn’t assume you have cleared your debts and now everything is fine. You still owe that cash – just in a different way to how you originally did, and to a different lender.
If you switch your loan to allow for consolidation, you need to figure out how much more you need to borrow to allow for this. You also need to do your sums to see how different interest rates can affect the amount you pay back over time.
Speaking of time, this is yet another element to consider. Repayments will be larger on a secured or unsecured loan than on a mortgage. However, you will hold the loan for far less time if it is a regular secured/unsecured product. A home advance would typically last for 20 or 25 years, possibly longer
As such, paying a higher interest rate for a personal loan running for five years might well be far cheaper than paying a lower interest rate on a home advance for 25 years. You might be shocked at the difference in the amount you would pay in the end.
Should I remortgage to invest?
This idea is based on releasing equity within your property to enable you to invest it elsewhere. This might mean buying stocks and shares, investing in long-term savings, or even investing in a business.
However, there are several things you should be aware of here:
Stocks and shares will fall and rise in value
Traditionally, stocks and shares do rise over time, but you may be looking at a shorter time to invest in such things. Unless you get it right and pick a new Coca Cola to invest in, you could lose money doing this.
Investing in long-term savings
Interest rates could impact this option. Rates are currently low, so you should shop around to see if you can get a good deal if you want to take this route. However, currently you may get less back than you would if you continued to pay off your home loan at a low interest rate.
Investing in a business
Starting your own business is challenging, exciting, and hopefully rewarding too. But many businesses fail in the first year. Yours may survive and thrive, but are you willing to risk your home on that?
Investing in an investment
Getting a new loan to free up cash for an investment is a challenging and potentially dicey thing to do. Do your research first and consider whether this is the best use of the equity in your home.
Should I remortgage to invest in a buy to let property?
This is like the above scenario, except in this case you are switching loans to free up the money to help you buy another property. Look at the equity in your home to see if this is a possibility. The amount of equity might give you the chance to borrow a significant amount to put towards a rental property, or even all of it. You will need to declare to your lender that this is what you intend to do.
You also need to be prepared for the challenge of being a landlord. Recent rule changes have led many landlords to exit the market, while others have seen their profits drop. Make sure you know what you are getting into; rental properties are not an easy way to make money. You need to fully research the area and consider whether running a buy-to-let property is going to work for you.
It might also depend on where you live. House prices, the buoyancy of the local rental market…all this plays a part. You might live in a hotbed of rental properties. Alternatively, you could live somewhere where landlords are already struggling. In that case, it would be foolhardy to join them.
Should I remortgage: Calculator
Trying to crunch the numbers when comparing a home advance to another type of loan is almost impossible unless you have a head for figures. That’s why there are plenty of remortgaging calculators available online. These have been designed to allow you to plug in the relevant figures, so you can compare one possibility with another. Don’t apply for anything until you know where you stand. Only then can you make the right decision for you.
View our mortgage calculators here.
The most important point to remember when looking at other home loans
There’s one word that is more important than any other if you want to replace your existing loan with a new one. That word is equity. If you are looking to change your loan because you need to free up some more cash – the aim in all the above scenarios – you need to have equity in your property that you can release. You also need to consider the loan-to-value (LTV) you can work with. This is usually 90% but it can vary.
Let’s suppose your property is worth £200,000. Assuming an LTV of 90%, you could borrow up to £180,000 against the property. Now, you must look at the current amount owed on your property. These examples show how this has a pronounced effect on the outcome:
Current amount owed on home £175,000 – you could borrow up to £5,000 more before hitting the maximum LTV
Current amount owed on home £120,000 – you could borrow up to £60,000 more before hitting the ceiling LTV
You also need to consider the possibility of negative equity if the housing market were to tumble. When prices drop, those who have borrowed close to the current value of their homes are going to find themselves perilously close to negative equity.
So… should you get a different loan?
Every situation is different. However, you can see how vital it is to explore all your options before you do anything else. Sometimes, there are better options for solving a financial issue. However, it can pay dividends to switch to a cheaper loan if doing so will save you money each month. That could help with other financial issues in a different way.
If there is one thing you can take away from this article, it’s the need to research every aspect of your own financial situation. Make sure you have all the facts and figures and make decisions based on your head rather than your emotions. That should steer you towards the best path for you when considering changing your mortgage.