The advantages and disadvantages of remortgaging – what you need to know

The latest post in my money hacks series is about remortgaging your property to save money. Recently we remortgaged for a better deal on our house and although it was a lengthy process it has saved us thousands in the long run. In this situation, I’m not talking about remortgaging to get out of debt, but to get a better monthly deal on what you’re already paying. If you are coming up on difficult times then remortgaging could be a viable option, if you’re savvy. Here are the pros and cons.

Advantages

To save money

Ok. So the main reason most people want to switch their mortgage to another provider is to save money.

And why wouldn’t you? In the same way you can switch bank accounts, utility suppliers, insurance companies and more to save on your regular outgoings, making the same savings on your mortgage should be no different. With such a large amount of money involved surely those savings could be even more worthwhile?

Well according to The Loans Department the way to save money on your mortgage is to find a suitable alternative that offers you a better rate of interest on your repayments. You might have to tie yourself into a fixed term to do it but that’s not a problem, you can always go through the process again when your new term reaches completion and see if there’s another new and preferable option than offered by your latest option.

To switch to a more attractive proposition

There are a variety of options that will make your mortgage appear more attractive. You might be able to tie your mortgage to your savings account and reduce the overall loan amount your lender takes into consideration, and subsequently, reduce your payments.

Similar mortgages tied to your current account can also offer bonuses, incentives and reduced costs. Just make sure that these facilities don’t come at too great a price. If the cost in paying for these options outweighs the savings then there’s no value in them to you at all is there?

To release money

If you’ve been paying into your mortgage for a reasonable duration and you hold a positive amount of equity in the property you could remortgage to release some of that capital for other uses. You may face an unforeseen emergency that requires a large injection of funds, or an exciting new business venture? Perhaps you’d simply like to make some extra finances available for those extra luxuries to make life better or easier – perhaps a new car or that trip of a lifetime? And why not? You’ve earned that money. A change in mortgage could release the funds and not necessarily impact your monthly payments if you find the right deal to manage it. Just make sure you aren’t getting yourself into hardship in the long run and will be able to afford the repayments in the future.

To pay off your mortgage quicker

With a better interest rate you shouldn’t always just see the advantage of reducing your payments. If you look at the reduction in your mortgage term instead you could plan on a future that involves a significant decrease in your outgoings sooner than you’d initially planned for and what you could do with that amount of money may be far preferable to saving the money in the here and now.

For greater financial stability

Buying into a fixed rate could provide a level of financial security over a tracker mortgage that could be a positive move if you need to keep a tight watch over your budget. If you’re in a position where a sudden change to your outgoings could be the problem that tips you into debt or into unmanageable finances then an alternate mortgage could provide the security you need through any periods of financial uncertainty.

Consolidating debts

It’s easy to let a few credit cards get out of control, the same with a loan, finance on a new car, or an emergency you’d planned should have been easier to manage than it turned out, and if these additional financial stretches get out of hand they can have a more serious impact on your monthly budget than you’d like.

Remortgaging gives you an option to add these unexpected amounts to the term of your current mortgage; but remember — the total amount of interest you’re likely to pay, even on a lower rate, could be a lot more over such a long term.

Increasing your mortgage amount

If you’re looking to increase the value of your property by adding additional features such as extra rooms, an extension or a garage, then adding the costs to your mortgage is an acceptable way of finding the funding to make them happen.

Your lender should be happy to negotiate, as the value of the initial investment property will rise accordingly to cover any additional risk.

Disadvantages

Longer terms of repayment

If you’re looking to release capital and you find that you’re already on a preferable interest rate the only other variable that can change is the mortgage term. This could mean you’re paying off what you borrow for longer than you initially planned to.

Repossession possibilities

Repossession is always a possibility with a mortgage loan. If you’re putting yourself under additional pressures then the chances of failing to make your repayments are higher and so too is are the chances of losing your home. You should always be sure that you’re operating comfortably within your budget before making additional changes.

Further fees and set-up costs

There isn’t just the interest rate to consider when looking into remortgaging. With every mortgage, or even making changes to an existing plan, there could be additional associated costs and fees.

There will often be a set-up fee for a new mortgage agreement just as there may have been with any previous plans, and you could also incur additional costs with opt-out fees or early repayment penalties when you leave your old mortgage. Just as it was with your initial mortgage, lenders will want to be sure they’re making a sound investment, so you may also have to pay again for any revaluation or associated conveyancing costs.

It all takes time

If the amount of money you’re likely to save isn’t as much as you hoped for is it really worth investing all the time it can take to organise for such a low return? With such busy lives, time is still a valuable commodity after all.

How much could I save?

The difference between a selection of standard remortgage options through the market in borrowing £100,000 against a £150,000 property with 20 years left on the term can vary by up to £30/month. Over a year that’s £360 and over the 20-year term that’s £7,200. If the setup fees are anywhere up to £1000 then you’d have to be willing to stay in the deal for up to 4 years before you’re making any savings. However, if there is no fee to pay then the savings start the minute you’ve made the switch.

As you can imagine, the more your property is worth the more you stand to save. Just double the figures above on a £250,000 property and you stand to save nearly £15,000 by completion.

There are plenty of remortgaging calculators and comparison websites you can access to research the many options available from the different providers out there. Do your research properly and the switch could be well worthwhile.

*This is a collaborative post.

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