Whether you are managing everyday finances or planning for a major milestone, it is important understand your borrowing options.
When facing important financial decisions, such as funding home improvements, consolidating debt or making large purchases, you may find yourself in the position of weighing up the benefits of remortgaging your home against taking out a personal loan. Both options come with advances and drawbacks and the option you choose will depend on your personal financial circumstances.
In the below article, we will offer key insights into the differences between remortgaging and taking out personal loans to help you make a more informed decision on whether it is better to remortgage or get a loan.
Remortgages
When you get a remortgage, you switch from an existing mortgage deal to a new deal. It does not involve moving home but helps you to secure better financial terms based on your current circumstances. Whilst it can be a smart financial decision, there are a number of factors which need to be considered. It is also worth noting that the average period for remortgaging is between three and six weeks, so it is not a quick fix.
If you have paid off a substantial percentage of your mortgage, you may be wishing to remortgage your property to access extra cash, for home renovations, large purchases, children’s education or big life events such as a wedding. Another reason some people wish to remortgage is to start paying more towards the mortgage each month or to reduce the mortgage term. You may wish to do this if you have increased your income since you started the mortgage or if you have paid off some debt.
It is important to be aware of your mortgage’s ‘tie-in period’ before trying to remortgage your property. A tie-in period is the window in your mortgage repayment where you cannot leave without a financial forfeit, known as an early repayment charge or ERC to your lender. According to Lloyds Bank, an early repayment charge is usually between 1-5% of what is still owed on the mortgage agreement – if the charge is brought about because of remortgaging, you may be able to add this charge onto your new mortgage agreement.
Benefits of remortgaging
- Lower your mortgage interest rates.
- Improve mortgage terms. If you have been repaying your mortgage off for a while you will have lowered the loan-to-value, meaning you will now own a larger share of your home outright. The consequence of this is that lenders may be able to offer better rates and conditions in a remortgage deal.
- Access equity. Your home equity is the value of your interest in your home. By remortgaging your home, you may be able to access some of this to spend or invest elsewhere.
Personal Loan
Getting a personal loan enables you to make purchases based on your credit report. You may wish to get a personal loan for freeing up money for a short-term goal or aspiration. A personal loan is a much quicker option than remortgaging as, whilst it can vary from lender to lender, it can take from just a few hours to around a week.
Benefits of personal loans
Personal loan terms are often much lower than mortgage terms, with common periods for repayment being between 1-7 years. Whilst the rates will likely be much higher than mortgage rates, the interest payments are due for a shorter period. For reference, the average first time buyers in the UK have a term of 31 years according to UK Finance.
Personal loans are also not taken out against your home. This means they do not put your property ownership at risk – with remortgaging, if you miss repayments, you risk your property being repossessed. Missing payments on a personal loan can, however, negatively affect your credit score which makes it harder to secure credit or loans in future.
How AFG Law Can Assist
AFG Law has a team of specialist remortgage solicitors and conveyancers to assist clients. If you are looking to switch mortgage lenders, then our team are here to help you.
We can effectively assist clients throughout England and Wales, so please do not hesitate to get in touch with us today.
Contact us at residentialproperty@afglaw.co.uk and 01204 377600.
Our residential property team can also assist with other areas of residential property, including selling a property, transfer of equity and equity release.