Remortgaging, also known as refinancing your mortgage, allows homeowners to either increase the principal balance of their mortgage, lower their monthly payments, or both. Despite its straightforward nature, remortgaging is often misunderstood by both homeowners and financial advisors, with some being biased against it. Mortgage sellers may promote remortgaging, while mortgage advisors often provide more accurate information about its benefits.
It’s essential to approach financial decisions, including remortgaging, with clear and pragmatic thinking. Avoiding remortgaging solely based on negative opinions may lead us to miss out on significant advantages. However, we must strike a balance and avoid excessive spending or borrowing beyond what is sensible, as it could lead to negative consequences similar to overspending our cash flow.
Our approach to managing a mortgage should consider the bigger picture and not solely focus on paying it down quickly. Understanding that remortgaging allows us to access equity, which is a form of wealth, helps us view it from a wealth management perspective. Instead of considering mortgage debt as a necessary burden, we should see it as a tool to leverage our home equity, much like cashing in other investments.
While witnessing our mortgage balance decrease and the value of our house increase can be satisfying, we should remain open to utilizing our equity when it benefits our overall financial interests. Restricting ourselves from using remortgaging wisely may prevent us from optimizing our financial situation. Therefore, we should consider remortgaging as a valuable tool in our financial management arsenal.
Remortgaging Can Be a Bad Thing, But Only if We Misuse It
Some people view remortgaging negatively and advise against it unless absolutely necessary, associating it with desperation. However, when presented with the opportunity to remortgage during a time of need, clients often realize its potential benefits. Remortgaging has saved many people money and, in some cases, even their homes. However, it is essential to avoid reaching a point where credit is severely affected and escape becomes difficult.
Shifting our perspective to see equity as wealth is crucial in adopting the right mindset for a sound financial plan. Viewing remortgaging simply as borrowing money and being overly reluctant to borrow against our house can lead to mistakes. Borrowing to buy a home is fundamentally different from borrowing for consumption, as it involves an investment component. Unlike consumption borrowing, which satisfies immediate desires, home loans provide a source of wealth over time, making them a more appealing and distinct form of borrowing.
Given the investment aspect of home loans, they should be prioritized over consumption borrowing. Choosing a better home that contributes to building wealth, even if it means controlling spending more reasonably, is a wiser decision. While consumption loans come with financial costs, home loans offer both consumption benefits (living in the home) and investment benefits (building wealth).
Considering that many people struggle with saving and investing, a home often becomes their primary or only significant investment. Referring to purchasing a home and borrowing for it as an investment could bring greater transparency to the situation. Just like taking out a loan to buy stocks is seen as an investment, the same perspective can be applied to home loans. This mindset shift would help individuals understand the true value and potential of homeownership as a means of building wealth.
Home Loans Create Wealth, Remortgaging Manages Wealth
After investing in our home, it’s crucial to recognize that our home equity is essentially our own money. When we remortgage, we are not borrowing in the traditional sense; rather, we are accessing our accumulated wealth. While there are interest costs involved, just like any loan, we must consider the benefits of having the money now versus later, much like spending our saved money wisely.
Using our home equity is not inherently negative compared to borrowing through other means. It can be better to borrow from our accumulated wealth in our home due to potentially lower borrowing costs. The real issue with remortgaging arises when we spend beyond our means or in an unreasonable manner, neglecting the impact on our future financial well-being.
The temptation with remortgaging lies in the potential to overspend, particularly because of the lower interest rates and longer amortization periods involved. As overspending is already a common problem, we must be cautious not to deplete the profits from our home ownership recklessly, just as we would avoid overspending our earnings or savings. Instead, we should consider the best overall financial path.
Remortgaging often involves adding to our current mortgage, sometimes with both investment and consumption aspects. For example, when we purchase a more expensive home and use the cashed-in equity from the sale of the old one to borrow more, it combines investment and consumption elements.
When we remortgage and access equity from our home, it is usually wise to extend our amortization, especially if it involves consolidating debt. This can lead to faster home loan repayment, as we use the money saved from managing other borrowing more efficiently. However, setting the terms too tightly may result in higher interest costs for consumption borrowing compared to the lower costs of adding these amounts to our mortgage, as the difference in interest rates can be significant. Therefore, finding the right balance is essential when remortgaging to ensure optimal financial outcomes.
Using Remortgaging Wisely
Apart from extending our amortization, there are two main reasons why people remortgage: borrowing for purchases and restructuring existing debt. Debt restructuring is a prevalent purpose, considering the overall high levels of debt. While some may tap into their equity for various purchases, using the money to remodel the home is a popular choice. Although remodeling adds value to the home and can be seen as an investment, the full amount may not be recaptured in equity. Nonetheless, it contributes to building wealth compared to other purposes that provide temporary enjoyment without lasting benefits.
When considering such projects, it is essential to assess how much value they will add to the home to understand their potential benefits. Projects that add substantial value should be distinguished from those primarily satisfying personal tastes, which may not contribute significantly to wealth.
Using mortgage refinancing to restructure current debts is generally a wise decision, offering benefits in terms of reduced interest costs and improved cash flow. However, it is essential to avoid transferring bad financial situations to the mortgage, potentially putting the home at risk. Proper planning for the future, including accounting for future borrowing needs, is crucial.
While mortgage advisors excel at helping with the present and bailout situations, they may not always provide comprehensive advice on managing the future. It is essential to consider both the new mortgage payment and future borrowing needs to ensure long-term financial stability.
Remortgaging is, in essence, about wealth management, and its success depends on how well we handle it. Managing the wealth in our homes is not overly complex; it involves spending money wisely and making sound decisions that align with our overall financial picture. Striving to improve decision-making can lead to a brighter financial future, where remortgaging becomes a valuable tool in managing our wealth effectively.
FAQs
What Does It Mean When You Remortgage?
Remortgaging involves closing out the existing mortgage and establishing a new one with different terms to improve the borrower’s financial situation, such as accessing funds to pay off other debt, reducing monthly obligations, or extending the mortgage’s amortization.
How Does It Work When You Remortgage?
Remortgaging involves paying off your current mortgage and applying for a new one with a higher amount, subject to current interest rates, which may result in either a higher rate or a penalty if the rates are lower, necessitating careful consideration of these factors.
Is Remortgaging Bad?
Remortgaging typically provides borrowers with the advantage of restructuring their finances to save on interest and achieve more manageable payments. However, the circumstances that led to the refinance, such as overspending or making unwise purchases, remain separate concerns, as some individuals may misuse refinancing to spend excessively on items they should probably avoid.
How Much Does It Cost to Remortgage?
The cost of remortgaging varies significantly depending on the lender and the specific situation. It includes setup expenses like legal and appraisal costs, and the previous lender may impose additional charges. When the new mortgage has a higher interest rate, the additional interest costs must also be taken into account.
Should I Remortgage to Pay off Debts?
Refinancing with a new mortgage can be highly beneficial if the savings from lower interest rates on the debt outweigh the associated costs. Likewise, if the objective is to lower monthly payments and the benefits of doing so justify the refinancing costs, it makes sense to take advantage of this opportunity. In many instances, refinancing debts with a new mortgage can result in significant financial advantages.
Do You Need a Solicitor to Remortgage?
When establishing a mortgage or any other secured lending product, legal assistance is necessary to place a lien on the property for the mortgage amount. In the case of a refinance, additional legal help is required to remove the old mortgage from the title and replace it with the new one. Nowadays, paralegals typically handle these tasks.
When Should I Look to Remortgage?
The ideal time to remortgage is whenever there is a substantial benefit to be gained. However, many people do not frequently calculate the advantages of refinancing and may miss out on opportunities. To address this, lenders often take a proactive approach and assist borrowers in uncovering potential benefits, enabling them to make more informed decisions about remortgaging.
Should I Get My House Valued Before Remortgaging?
When considering remortgaging, it’s beneficial to have a rough idea of your home’s value before entering into any discussions. Typically, individuals do not get a formal appraisal for this purpose, as the lender will conduct a property valuation and charge a fee accordingly. Instead, many people rely on methods like looking at property values in the neighborhood or referring to their property tax bill to estimate their home’s worth.
Can I Remortgage with Bad Credit?
Remortgaging with bad credit is possible, but it is generally not advisable due to the significantly higher interest rates associated with obtaining a new mortgage without good credit. Instead of improving the financial situation, a high-interest refinance can exacerbate existing issues. The primary goal of refinancing is to save money on interest, not to end up paying more of it, which is why it is crucial to carefully consider the implications of remortgaging with bad credit.
How Long Does a Remortgage Take?
Remortgages typically require a couple of weeks or more to process, depending on how quickly the lender can handle the application and the complexity of the deal. If you choose to stay with the same lender, the process may be faster since much of the required information is readily available. However, even in such cases, completing the remortgage still takes a significant amount of time.
What Happens If You Remortgage Your House?
Remortgaging your house alters the mortgage’s structure and usually involves increasing the principal balance. As a result, your monthly payments may increase, especially if you are early in the original mortgage term. However, if you are further along in the mortgage and the additional funds added are substantial, it is possible to increase the debt while lowering your monthly payments if that aligns with your objectives.
Can You Remortgage a House with No Mortgage?
Remortgaging involves replacing an existing mortgage with a new one, so you do need to have an existing mortgage to be able to remortgage it. However, homeowners who have fully paid off their homes can still get a new mortgage, often referred to as a “cash-out refinance,” to access some of their home’s equity. The approval for this new mortgage will depend on meeting the lender’s qualification criteria.
