Remortgaging with more principal
A remortgage is a good method for getting a better deal on your mortgage loan, which can free up cash flow for other financial needs. However, it is important to note that you are using your home for collateral in this situation, which means that if you default on your loan, the bank has the ability to take your home away from you. While this is a necessity of home ownership for most Brits, the idea of taking additional cash from the equity of your home is not usually essential.
Taking advantage of your home's equity is an attractive prospect. For a low interest rate and an affordable monthly payment, you can finance higher education for your children or a holiday for the family. You can consolidate messy outstanding debts into a single, easy to track and easy to pay, monthly payment. While this sounds good on the surface, it is important to understand exactly how much this additional debt might cost you.
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Let's say you take an additional £10,000 on your remortgage. You have the equity in your home, and you want to use the money to pay off other debt and take a nice family holiday. The amount is tacked onto your current mortgage balance for a fixed rate of 4% over a period of five years. The additional amount of principal would raise your monthly payment amount by about £180. That is much less than the monthly figure of £500 that you would be paying on your 19% personal loan over the next two years. Sounds like a bargain, right?
There are two problems with this scenario. The first is that you are financing your loan balance over a longer period of time, which means more interest is paid on the loan throughout the term. Your loan that seemed so much more affordable has now become much more expensive.
The other issue is the collateral you are using. Now if you cannot make the payment on your loan, your homeownership is in jeopardy. Instead of heading to the bank to work out a revised payment plan on a personal loan or going to a financial advisor to work out an IVA, you are facing foreclosure.
Should You or Shouldn't You?
Using the equity in your home to secure more cash is not always a bad idea, but it should be weighed very carefully. First, you want to make sure you can afford your monthly payments throughout the entire loan term to ensure your home ownership is not threatened. You also need to determine whether the interest you pay out on the loan will be worth the money you borrow. If you can confidently answer yes to both of these questions, than cashing in on your home's equity might be the right decision for you.
Weigh the costs of using your home's equity before you talk to a lender. Some companies may try to talk you into a larger loan balance because it means more interest payments for them. By analyzing this choice on your own, you will be better prepared to deal with their urgings in this direction. Don't let any lender push you into borrowing more money than you need. If the lender uses these tactics, find another mortgage company.