Should You Borrow More When Remortgaging?

Is it a good idea to borrow more when remortgaging?

Half of homeowners who remortgage borrow more money. Nearly half (49%) of homeowners who remortgaged in July borrowed more money. According to a new report released by the conveyancing provider LMS, homeowners borrowed an additional £16,389 when refinancing their mortgages. One-third (32%) of those who remortgaged stated that their main goal was to free up equity in their home.

How does remortgaging to release cash work?

A fixed-rate mortgage requires you to make the same monthly payment for a set period of time, usually two or five years.

You must remortgage at the end of this period or you will be moved to your lender’s standard variable rate, which is usually much higher.

You may be able to borrow additional funds on top of your outstanding balance when you remortgage, 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.

  1. Your home’s equity: as you pay off your mortgage, the ‘chunk’ of property you own grows. Assume you obtained an 80% mortgage (with a 20% down payment) five years ago. Over the last five years, you will have repaid thousands of dollars on your mortgage balance, implying that you now own more than your original 20%. This means you might be able to remortgage at a lower loan-to-value ratio (say, 70% or 75% ) and borrow more money if you want to.
  2. Whether or not the value of your home has increased: Because property prices have risen significantly in recent years, there’s a good chance your home is now worth more than it was when you bought it. When it comes time to remortgage, if the value of your home has increased, you will have more borrowing power.
  3. Your personal circumstances: If you remortgage on a like-for-like basis with your current lender, you will not be subject to an affordability assessment. If you switch banks or apply for a loan, however, you will be subjected to additional checks to ensure that you can afford the new repayments. These checks will take into account your income, job stability, and any debts you may have.

Borrowers are enticed by low mortgage rates.

For several months, mortgage rates have been falling 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 most cost-effective way to obtain additional funds.

Is adding to your mortgage the most cost-effective way to borrow? 

It may appear that adding to your mortgage is less expensive than taking out a personal loan or credit card.

The best personal loan rates for borrowing £20,000 over five years are slightly less than 3%, but the rate you receive will be determined by your specific circumstances.

Those who want to borrow less money can get a credit card with 0% interest on purchases for up to 22 months.

Despite the low-interest rates, it is not a no-brainer to borrow more on your mortgage. The important thing to remember is that any additional borrowing will typically be paid off over the same term as your mortgage, which means you will pay more interest.