Paying off one’s mortgage is a life changing achievement for many people who now find themselves with more money to spend each month and the satisfaction of owning outright a property worth a considerable amount of money. The question of should a person remortgage as opposed to taking out a large personal loan is what we shall take a look at in this article.
In this article about remortgaging as opposed to taking out a personal loan we shall examine:
- A house that has been paid for is a large asset
- The meaning of home equity
- What remortgaging means
- Homes may be borrowed against
- What a personal loan is
- Different kinds of personal loans
- Which of the two borrowing methods is better?
- A simple example of interest rates
You could be sitting on a lot of money
People who have managed to pay off a lifetime mortgage find themselves the proud owners of their homes. It is a great feeling to have accomplished this and means that they have managed to save quite a large amount of money over their lifetime. Most people still have a fair way to go with regard to paying their mortgage, but many will have already accumulated a fair amount of money from the equity in their house.
What is home equity?
The best definition of the meaning of home equity is the asset that is the result of the owner of the home’s interest in the property. The way to calculate the amount of equity in a home is to add up any outstanding debt on the property and subtract it from the market value of the house. The amount of equity in a home can continuously rise if repayments are paid and property markets rise.
In simple terms, the equity value of a house is the part that you have paid for and is truly yours. Of course, if you have bought your house with a mortgage, the property is yours but your lender still has an interest in the property until the loan can be repaid in full. For most people the amount of home equity that they have is their biggest asset. Most people rely on this money to enhance their retirement, and some decide to release equity to raise money.
What does remortgaging mean?
The easiest explanation of what remortgaging your home means is taking out a new mortgage either to borrow capital against your property or to replace an existing mortgage with a better deal. Around 35% of all home loans in the country are actually second mortgages. Many mortgages have low repayment rates for a set number of years, designed to capture new business. These kind of mortgages are usually with fixed, tracker or discount rates that are normally for terms of 2 to 5 years after which the payments increase.
Remortgaging your home means taking out a new mortgage either to borrow capital against your property or to replace an existing mortgage with a better deal.
Experts advise the public to continuously keep an eye on the mortgage market as new deals are always on offer that could save a borrower a large amount of cash over a year in lower monthly payments. Despite fees for the costs of the change over, many people find that by changing their lender they can end up paying less every month even after all the expense has been accounted for.
You can remortgage to borrow money against your house
When people find their bank reluctant to lend them money for various reasons, or they are not offering good lending terms, many people choose to borrow money from their home equity by remortgaging their house. When people consider this, it is important to calculate very carefully all the costs that are involved with paying off an old mortgage and getting the new one. In some cases it can be more financially sound to find another form of borrowing. If the home is owned outright then there will be less fees involved.
So what have we learned so far?
- Paying off a mortgage means that you now have a lot of money
- The equity value of a house is the part that has been paid for subtracted from the market value
- Home equity is probably most people’s largest asset
- People remortgage to raise capital against their home or to switch deals for better rates
- People who own their house sometimes decide to remortgage to release equity
- Sometimes when the property is still mortgaged it may be more economical to seek other forms of borrowing.
What is a personal loan?
A personal loan is also referred to as an unsecured loan. This is when a fixed amount of money is borrowed with a fixed rate of interest over a fixed amount of time. The repayments are calculated on the amount borrowed with the fixed amount of interest added and divided into monthly repayments that will last as long as the agreed term. You are borrowing money from a lender who is charging you interest for his fee. The good thing about personal loans is that you are provided with a source of instant cash to purchase something that would otherwise take years to save for.
Personal loans can go up to 50,000 pounds, but they are usually used to finance smaller purchases or home improvements. The interest rate that you will be charged typically depends on a person’s circumstances but is generally anything from 6% to 13%. Personal loans usually have a time limit of 10 years but the most common ones that people take out are from 1, 3 or 5 years. As with any form of credit, the shorter the loan time the less interest will be paid back.
What are the different kinds of personal loans
Generally speaking there are two different kinds of personal loans that people choose to take out. The first kind is called a fixed rate personal loan. This is the usual kind of personal loan which involves the monthly repayment of a fixed amount. This kind of repayment system works well for most people who find that it makes the budgeting their monthly finances easier when they know exactly how much money will be going out.
Variable rate personal loans have a fluctuating rate over the period of the loan depending on markets and the Bank of England base rate.
The other, less commonly used loans, are called variable rate personal loans. This kind of loan does not have a fixed interest rate, instead the rate may fluctuate over the period of the loan depending on markets and the Bank of England base rate. In real terms this means that your monthly payments and the total amount of the money that was borrowed may increase or decrease. If the rates were to rise it could mean that a person ends up paying more than they had budgeted for and may even lead to them not being to afford the repayments.
Remortgaging can be the best option to access low and competitive interest rates. However, being in a position to do so will also depend on whether your credit rating has improved since you took out your outstanding mortgage. Remortgaging will help you to get a competitive low and keep your monthly repayments as low as possible. However, if you credit score has worsened since your current mortgage, it is best to consider other forms of borrowing.
Home equity loans, or remortgaging, are often the best way for homeowners to pay for their home improvement plan. Depending on your financial circumstances, and the amount and term for which you wish to borrow, personal loans may be a more suitable route. By utilising a personal loan for home improvements, the borrower would not have to take a risk with respect to using their home as collateral. However, home equity loans have notably lower interest rates compared to personal loans.
The primary disadvantage of taking out a home equity loan, or remortgaging your home, is that your property would have to be used as collateral against the amount that you borrow. In the event of defaulting on your repayments, you would face the risk of foreclosure of your property. However, the security that this form of collateral provides to the lender means that they are able to offer you low interest rates compared to other forms of borrowing.
Which option works out better?
This is a difficult question to answer because it can depend on many factors. One of the most common reasons that people find themselves in this position of needing to borrow money is when they want to pay for home improvements. Remortgaging a house, when the money will be used to add extra value to the house, is something that lenders favour when they are asking the reasons that you want to take out the money. Another common reason is to pay off other existing debts. Lenders may ask you to show proof of payment or invoices for building work when you are asking them for a large amount of money.
A personal loan that is to be used to fund repairs could be used if you had a good credit score. Many lenders will go up to 50,000 if you are eligible. This would mean very high repayments as many personal loans are for 7 year terms, although they can be as long as 10 years from some lenders. The advantage of a personal loan, if you can get it, is that the balance will be paid off quickly which as with all debt repayment, equals lower interest.
Here is a simple example
Many people believe that remortgaging is the cheapest way to loan money as the interest rates on mortgages are considerably lower than on other kinds of finance. If you consider this example then you then you can see how this is so. If the sum of 1,000 pounds were lent over a period of 20 years at 5% it would work out twice as expensive as borrowing 1,000 for 5 years at 10%.
Mortgage repayments will be less in monetary monthly repayments but will work out more expensive in the long run. The question of which method of borrowing is better value depends on people’s monthly outgoings and which method of repayment would better suit their needs. Some mortgages allow clients to overpay by 10% each year without incurring penalties while they are in the first few years of a new deal. If the extra debt were paid off as soon as possible then remortgaging could make financial sense.
So what can we conclude about remortgaging compared to large personal loans?
Lending criteria are quite strict and can depend on many different issues. There are advantages to both forms of lending but the real value to be had would depend on the person applying and their current financial situation. As with all debts, the quicker they are repaid, the less interest is incurred. For people who do not have the financial strength to loose a big chunk of their salary to a high repayment scheme then if the fees to remortgage were favourable it could work out a good option for them.