When remortgaging, half of homeowners borrow more money. Nearly half (49%) of homeowners who remortgaged borrowed additional funds. According to a new report by the conveyancing provider LMS, homeowners borrowed an extra £16,389 when refinancing their mortgages. One-third (32%) of those who remortgaged said their primary goal was to free up equity in their home.
How does remortgaging to release cash work?
If you have a fixed-rate mortgage, you will make the same monthly payment for a set period of time – typically two or five years.
At the end of this period, you must remortgage or you will be moved to your lender’s standard variable rate, which is usually much higher.
When you remortgage, you may be able to borrow additional funds on top of your outstanding balance, such as to fund home improvements, assist a family member with a down payment, or pay off debts.
Will you be able to borrow more money if you switch?
The ability to borrow more when remortgaging is determined by three factors.
- The amount of equity you have in your home: as you pay off your mortgage, the ‘chunk’ of property you own grows. Assume you took out an 80 percent mortgage (with a 20% down payment) five years ago. You will have repaid thousands of dollars off your mortgage balance over the last five years, implying that you now own more than your original 20%. This means you may be able to remortgage at a lower loan-to-value ratio (say, 70% or 75% ) and borrow more money if you so desire.
- Whether or not your home’s value has increased: property prices have risen significantly in recent years, so there’s a good chance your home is now worth more than it was when you bought it. If the value of your home has increased, you will have more borrowing power when it comes time to remortgage.
- Your personal circumstances: If you remortgage like-for-like with your current lender, you won’t have to go through an affordability assessment. However, if you switch banks or apply for a loan, you will be subjected to additional checks to ensure that you can afford the new repayments. These checks will consider your income and job stability, as well as any debts you may have.
Borrowers are enticed by low mortgage rates.
Mortgage rates have been falling for several months and have reached historic lows at some loan-to-value ratios.
Because of the low interest rates, some homeowners may believe that borrowing more on their mortgage is the cheapest way to get extra cash.
Is adding to your mortgage the most cost-effective way to borrow?
Adding to your mortgage may appear to be less expensive than taking out a personal loan or credit card.
The best personal loan rates for borrowing £20,000 over five years are just under 3%, but the rate you receive will depend on your circumstances.
Those looking to borrow less money can get a credit card that offers 0% interest on purchases for up to 22 months.
Despite the low interest rates, borrowing more on your mortgage is not a no-brainer. The important thing to remember is that the additional borrowing will usually be paid off over the same term as your mortgage, which means you will pay more in interest.
Your home may be repossessed if you do not keep up repayments on your mortgage.
We normally charge a fee for mortgage advice, however this will be dependent on your circumstances. Our typical fee is £250