Is it better to remortgage or get a loan?
Funding home improvements or paying for a big event can be expensive. Homeowners are often left with a choice of either remortgaging their property or applying for a personal loan.
In this article we compare the process of remortgaging versus taking out a personal loan, explain the pros and cons of each and provide a side-by-side comparison table of the key points.
Pros and Cons of remortgaging
- Repaying over a long period brings down the monthly cost
- Loan is secured against the property
- Can consolidate all debts into one single repayment
- You need to have sufficient equity in the property
- Not ideal if you are planning to move as not all mortgages are portable
- Repaying over a longer period increases the overall repayment
- You may have to pay an arrangement fee and/or solicitors fees
Pros and Cons of remortgaging explained
A remortgage settles an old mortgage and moves a home loan to a new product. There are a few different ways to use a remortgage. Homeowners can remortgage when they come to the end of a deal to avoid moving onto a pricey standard variable rate (SVR) or can switch during a deal if they find a more suitable offer that is either cheaper or provides more flexibility.
Another way to use a remortgage is to release cash from your property. This involves using the money from a remortgage to pay off the existing debt, but you take a larger loan and withdraw the excess amount as cash. This depends on there being enough equity in your property to be able to get a big enough loan. Once you have received the cash you can use it for anything from spending on major events such as a wedding, to home improvements or settling other debts.
One of the biggest benefits of remortgaging is that you often get to move to a cheaper rate, which will save you money on your monthly mortgage repayments. This is especially important if you are coming to the end of a deal as lenders will typically automatically move you to an SVR, which are a lot more expensive than what is available on the open market.
If your property has grown in value, a remortgage is also a useful way to access cash and pay it back over a longer period. The amount taken will be added to the overall value of a loan, meaning you do end up with a bigger debt, but you will be able to pay it over the term of the mortgage which could be as long as 20 to 30 years, making the monthly payments effectively cheaper than if you took a personal loan. You may also be able to pay it off with overpayments or by remortgaging again when your new deal ends.
Homeowners need to watch out for fees. There may be exit penalties, known as early repayment charges for leaving before the end of a deal and you may also have to pay product or adviser fees to arrange your new product. This may outweigh any lower-priced deal so you need to work out the overall cost, including the rate and fees to see if you are still making a saving by switching.
You may find it harder to remortgage if your circumstances have changed since the introduction of tougher application rules and interest rate stress testing under the Mortgage Market Review in 2014. Lenders can be more fussy about provable income, which can make it more difficult for those who are self-employed.
It can also be hard to get a remortgage if you only have a small amount of equity in the property as most lenders will only consider loans above 75% loan-to-value.
You need to consider if you can afford the repayments on the new product. Even if they are cheaper, will a change in circumstances or major expense in the next 12 months affect your income? Similarly, a remortgage may not be best if you are planning to move shortly as not all mortgages are portable and it can be pricey to exit a new deal straight away. Those using a remortgage to pay off debts also need to keep up with the repayments or risk losing your home and remember to take steps to avoid falling into bad debt again.
For more information see our article, What is remortgaging and how do I do it?
Pros and Cons of a personal loan
- Quick decision as not based on income and expenditure
- No solicitors or arrangement fees
- Debt is paid quicker due to the shorter term
- Property not at risk
- Higher monthly repayments due to the shorter term
- Restricted to a maximum loan of around £35,000
- Missed payments will harm your credit score
Pros and Cons of a personal loan explained
Personal loans can be used for anything from buying a car, settling debts or paying for a major event. Unlike a remortgage, which is assessed based on your income and affordability tests, a personal loan application is broadly based on your credit report. If you have a clean credit report and decent credit score then lenders are likely to give you the best rates. Unlike a remortgage, personal loans will usually not don’t have any arrangement fees.
You can get loans for around 3%. The sweet spot for loan deals is around £7,500 to £15,000, which is where the most competitive pricing is offered. Most loan companies will lend up to a maximum of around £35,000, but some have been known to go up to £50,000. Remortgage borrowers can typically borrow more and rates are pretty low depending on how much you borrow. The extra balance that you are withdrawing will be added to the full mortgage rather than you having to pay it separately.
You may not always be offered the advertised rate on a personal loan though as lenders only have to supply this to 51% of applicants.
As mentioned earlier, any extra cash taken from a remortgage is added to the overall loan and paid off over the mortgage term, which can be anything up to 30 and even 35 years. This is longer than a personal loan, which usually lasts for one, two or five years. Personal loan repayments can, therefore, be more expensive but the application process is less brutal as there won’t be tough affordability tests and property valuations. It will mainly depend on your income, credit score and report. This also makes the process of getting a personal loan faster than a remortgage as you are not waiting for different underwriting departments and valuers.
A personal loan doesn’t put your property at risk as most are unsecured. Any missed payments or arrears will harm your credit score and make it harder to get debt such as loans or overdrafts in the future. Making multiple applications for credit can also harm your score so you are better off using a comparison website which will do a soft search and highlight the products and rates you are most likely to be accepted for.
Most remortgages are from a bank or building society but there are some extra options if you want a personal loan as these are also offered by peer-to-peer lending platforms as well as traditional lenders.
Remortgaging vs Personal loan
|Interest rates||Depends on loan-to-value. Rates can be as low as 1.5%||Lowest rates start at 2.9%. Varies by lender, loan size and depends on credit score|
|Term length||25-35 years||
|Fees||Depends on the lender but can range into thousands of pounds||None|
|Maximum borrowed amount||Depends on loan-to-value but can be up to £1m||Typically around £35,000 but some lenders go as high as £50,000|
|Repayment T&Cs||Your home may be repossessed if you fail to keep up with repayments. There may be fees for exiting early and you may be able to overpay a portion each year||The rate will depend on your credit score. Late or missed payments could result in extra interest being charged and may impact your credit report. Some lenders will offer payment holidays and overpayments|
Alternatives to personal loans or remortgaging
Another way to access extra cash is with a credit card. The amount of credit you get will depend on your credit rating and you need to ensure you make the monthly repayments otherwise you will be moved onto the pricey annual percentage rate (APR), which can be around 19 per cent. There are also credit cards that offer interest-free spending or if you want to settle your debts you could use a zero per cent balance transfer card to pay off old debt and then make repayments without any interest. Some credit card companies offer balance transfer deals that let you repay your debt interest-free for around two and a half years. Again, remember to make the repayments though or you will be charged the APR.
If you have an idea of what you need the cash for and have time, you could make a plan to put money away rather than borrowing. There are easy access accounts that let you withdraw at any time but the best rates are offered over longer fixed periods. You need to consider if your savings account is beating inflation or you could effectively be locking away your cash and making a loss in real terms. Check out our article 'Best savings accounts rates' which is regularly updated with the best easy access savings rates.
Another option, if you can wait five years or more is to take a bit more risk with the prospect of higher returns by investing in the stock market through funds and shares. There is a risk of losing money if your investments fall in value though so it is important to build a diversified portfolio or seek financial advice if you are unsure. Check out our article 'The best performing funds to invest in right now'. If you are new to investing, then an ISA is a good place to start, take a look at our article 'Best and cheapest investment ISAs for beginners'.
There are a couple of factors to consider when deciding whether a remortgage or personal loan is right for you. You can typically get more cash by remortgaging compared with a loan, depending on your property value. The payments are also normally cheaper as they are spread over the full term of the mortgage. However, your home is at risk if you fail to keep up with repayments so you need to be sure you can afford the larger debt that will be added to your overall mortgage. A remortgage is treated as if it was a new mortgage application so can be time-consuming as lenders consider your income and assess your affordability. You will also be left with the mortgage once the deal period ends, so you will have to keep an eye on the market to remortgage again.
The main benefit of a personal loan is speed and you don’t need to pay anything upfront, while with a remortgage you will need to provide the equity in your property as a deposit. The application will be done online and you won’t need to make time for a lengthy telephone or branch interview that you may need for a remortgage application. The requirements are slightly easier as it based on your credit report, so as long as you have a clean record you should be able to get the best rates. You also don’t need to be a homeowner and if you are, your property is not taken as security so is not put at risk. The monthly repayments will be more expensive and the amount you can borrow will be restricted, however the debt will be repaid far quicker. Some personal loan providers may even let you take payment holidays, which is less likely with a mortgage lender.
Ultimately, the choice of remortgaging or getting a personal loan will be down to you as there are pros and cons for both. If you do decide to remortgage, then you should shop around to get the best deal. Check out our article 'How to remortgage in 5 simple steps' where we explain the process in more detail.
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