You may be looking into remortgaging or getting a personal loan if you are intending to borrow money to fund home improvements such as an extension, kitchen renovation, or planning a big event.
Should I get a Loan or Remortgage?
Both a remortgage and a personal loan are effective ways of generating funds and each comes with its own advantages and disadvantages. Although there are other ways to borrow money, the two main options in order to finance home improvements or perhaps to consolidate debt are either remortgaging or getting a secured loan.
In a Nutshell: Remortgaging
How does remortgaging work? Remortgaging is the process of getting a new mortgage to replace your existing mortgage which can result in the release of funds and shorter-term or lower monthly repayments.
In a Nutshell: Personal Loans
A personal loan is a sum of money that is lent from a bank to the borrower and in return, the borrower pays it back in instalments with interest. Personal loans can also be referred to as unsecured loans.
In a Nutshell: Secured Loans
Secured loans, in contrast to personal loans, necessitate the borrower to pledge an asset, such as property or a vehicle, as collateral. This added security can result in lower interest rates and a higher borrowing capacity, but carries the risk of losing the asset if the borrower defaults on repayments.
The option that is best for you will depend on your situation, circumstances, requirements, and the different interest rates available. Below we will outline the pros and cons of each of these funding methods so that you can make an informed decision.
Why Should I Remortgage?
Remortgaging can be a good option for a number of different homeowners for a range of reasons. Remortgaging can result in getting a lower interest rate than your current mortgage, lower monthly repayments, a change of mortgage term, or increasing the amount you can borrow.
Remortgaging is a long-term method of financing but can be used to raise substantial funds.
Our advisors will work out if a secured loan or remortgage works best for you.
Pros of Remortgaging
There are a number of advantages to remortgaging rather than getting a loan. Some of these advantages include:
Reduced Monthly Payments
Once the initial introductory offer period with a fixed rate is over with your current mortgage, your interest rate will increase. By remortgaging, you may be able to change to a mortgage with a lower interest rate than your existing mortgage.
If you are considering debt consolidation this can mean the interest rates on mortgage deals are almost definitely going to be lower than the interest rates you are paying on personal loans or credit cards. This will result in lower monthly payments overall. Reducing your monthly payments enables you to save money to take the strain off your monthly outgoings.
Access Large Sum
The process of remortgaging to a new mortgage provider can result in the freeing up of funds. This is because you can use the equity that you have built up in your home to put towards a new mortgage with a lower loan to value.
You can apply for an additional large sum that you raise funds for a home extension, a kitchen renovation, or a number of areas such as paying off and consolidating any debt.
Pay off Your Mortgage Sooner
Remortgaging can reduce the term of your mortgage. This is due to the fact that you own a higher proportion of the house than when you initially bought it, or the value of the house has increased. This can be further completed by increasing your monthly payments if you can afford it.
Reducing the term of your mortgage, even by five years, can make a substantial difference in the total cost of your mortgage and save money in the long run.
Cons of Remortgaging
There are some disadvantages to remortgaging rather than getting a loan. Some of these disadvantages include:
Increases Overall Payment Period
If you remortgage to release funds for home improvements, this will result in increasing the term of your mortgage in order to borrow the money necessary for the improvements.
Essentially, you are using the value of the house as collateral for a secured loan in order to gain funds.
There are an array of fees that can be incurred when remortgaging. These depend on whether you remain with your existing mortgage lender or change to a new one.
In order to remortgage with a new lender, you will need to go through the entire mortgage approval process which includes lots of paperwork. This is because you will be treated as a new customer when applying for a remortgage with a different lender.
If you remortgage away from your existing mortgage deal you may need to pay early repayment charges. Talk to a mortgage broker before you make the decision as the average early repayment charge on your current mortgage is likely to be in the region of 3%.
How a Mortgage Broker Can Help You Remortgage
At YesCanDo Money, we are experienced mortgage brokers with a team of mortgage professionals here to help you. We provide an array of expertise on whether it makes sense to borrow extra money and to help get the best rate and deal.
Our team of mortgage broker experts will help you find the best mortgage deal for you according to your situation and requirements. We have been helping homeowners remortgage advice for over 25 years and have received thousands of 5-star reviews.
Remortgage to a better rate
Whether you are looking to release equity or want to look at lower interest rates, we can help. YesCanDo mortgage advisors do it all for you! The advice, the application, all the paperwork, the bank and solicitor chasing, and take away the stress. Plus we’re fee-free.
Why Should I Get a Loan?
Getting a personal loan or a secured loan is the other main option when considering completing home improvements or extensions.
Loans can be a good option for a number of people due to the short time it takes to get a decision on the amount that you can borrow and not having to have any collateral.
We have come across many examples that people will get started on home improvements with the use of personal loans due to needing the funds quickly. Although the interest rates are often lower on a personal loan the term is also shorter leading to higher monthly repayments overall. Once the home improvements are completed the property may have increased in value giving the option to remortgage to a lower interest rate and lower monthly mortgage repayments as the loan-to-value is now lower.
Pros of a Loan
When applying for a secured loan you will usually find it a relatively quick process. Banks tend to make their decision as quickly in a matter of days, whereas remortgage applications can take weeks or even months.
This can be important if there is a timely nature to your need for funds such as a family event.
- Quick Debt Payoff: Personal Loans or secured loans are a short-term method of financing, due to this nature, repayments are also over a short period of time. This means that you can use the loan and pay it back in as little as a year which will benefit some people.
- Property isn’t at Risk: Taking out a personal loan is a relatively simple process and doesn’t require any collateral. In contrast remortgaging adds to your mortgage debt and puts your home at risk of repossession if you fail to make the repayments.
Cons of a Loan
There are some disadvantages to getting a loan rather than getting a remortgage. Some of these disadvantages include:
- High Monthly Repayments: Personal loans are taken out over a relatively short period of time, hence the monthly repayments are also over a short time. This results in the monthly repayments being relatively high. Loans also have a high-interest rate, and hence the repayments are also steep. If any of these payments are missed, then this can result in damages to your credit history and score. It’s worth noting that a secured loan can offer you a lower interest than a personal loan. We often get asked does a secured loan affect remortgaging. It’s been our experience and we have many examples that a secured loan can stop or make it more difficult for you to remortgage in the future.
- Maximum Value: The loan value is dependent on a number of factors such as credit history, occupation, and situation. Despite the value, you are able to borrow varying in value, a loan results in a smaller amount of capital being available when compared with remortgaging.
- Credit Score Dependant: Personal loans are credit score dependent, therefore, if you have a relatively poor credit score it is unlikely that the option of either secured loans or personal loans will be open to you. To get a good interest rate will rely on your having a decent credit score
Remortgage or Loan: Which option is best for you?
There are clear discrepancies between taking out a loan or remortgaging your house. The table below shows the clear differences between the two and should assist you in deciding which is the right option for you.
|Interest Rates||Typically lower, depends on loan-to-value ratio.||Usually higher, vary by lender, loan size, and credit score.|
|Term||Longer, 20-35 years.||Shorter, 1-7 years.|
|Maximum Borrowed Amount||Up to £1m, depends on loan-to-value ratio.||Around £35,000, but some lenders offer up to £50,000.|
|Fees||Can be over £1,000, depending on the lender.||Arrangement fees included in the overall APR.|
|T&Cs||Your home may be repossessed if repayments aren't maintained. Fees may apply for early exits. Overpaying a portion yearly is possible.||Rate depends on credit score. Late or missed payments may result in extra interest and credit report impact. Payment holidays and overpayments available.|
Related reading: If you choose to remortgage then read: Remortgage Same Lender: A Comprehensive Decision-Making Guide
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