If your home is worth more than your existing mortgage then you have “equity” in it. That equity has a monetary value. It, therefore, makes sense to leverage it as much as you can. Here are some points to consider.
Stay open to remortgaging
Remortgaging can be very useful even if you currently have no interest in releasing equity from your home. There are three main reasons for this. Firstly, the best deal available to you when you (last) took out a mortgage may not be the best deal available to you anymore.
In fact, your great deal may only have been a great deal due to an introductory offer. If this has now expired, you should certainly investigate remortgaging as soon as possible. Secondly, your financial situation may have improved opening up more deals to you. For example, your credit rating may have increased thanks to your track record of punctual mortgage repayments.
Thirdly, you may be able to apply for a mortgage with a lower loan-to-vehicle ratio. Even if your home’s value has remained flat, your repayments will have reduced the amount you owe. If your home’s value has increased, the differential will be even greater. You may be able to leverage this to reduce your repayments and save even more money.
Remortgaging versus getting a personal loan
For clarity, in the UK, if you own a home, any debt you take out can be secured against it. The only question is how the lender goes about the process. With some debts, like mortgages, the lender and borrower mutually agree that the debt will be secured against the property. With other debts, the lender has to apply for a charging order to secure the debt against an asset.
This is not an argument against taking on further debt if you own a home. It is, however, intended to highlight the fact that as a homeowner, failure to repay any debt could put your home at risk. It is therefore vital that you do thorough research and take all decisions mindfully.
The maths of remortgaging
When comparing the costs and benefits of remortgaging versus getting a personal loan, you need to analyse both the setup costs and the ongoing costs. Remortgaging is, literally, taking on a new mortgage. This means you should expect it to involve all the usual set-up costs of taking out a mortgage such as having your home valued.
The ongoing costs will be determined by the amount borrowed, the interest rate and the duration of the loan. This is where you need to be very careful to think about what you are likely to do rather than what you theoretically could do.
For example, if you compare a mortgage with a 20-year term to a personal loan with a 5-year term, you could find that the mortgage works out more expensive. Even though its headline interest rate could be lower, the longer term means that you end up paying more - if you keep the mortgage for the full term.
If, however, the 20-year mortgage allows you to make overpayments without penalty and you are in a position to make those overpayments, then it could work out more affordable. Effectively, you would treat a part of your 20-year mortgage as a low-interest, five-year personal loan. Of course, this approach would only work if you actually did make those overpayments.
Finding the right deal
Navigating your way through financial products can be complicated at the best of times. Adding in the need to make sure you do potentially complex sums accurately can make the process even more complicated. If that’s putting you off from making a decision that could have a significant financial benefit, then get help from a professional such as a mortgage/loan broker.
If you need advice please do not hesitate to contact me.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage
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