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.
Why should I consider remortgaging?
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.
For more information see our article "What is remortgaging and how do I do it?"
Pros of remortgaging
- It can bring down your monthly costs: If your property has grown in value, a remortgage is a 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.
- It can help you consolidate other debt: If you have a few different loans and/or credit cards, it could make it easier to manage your finances if you pay them all off and instead increase your overall mortgage debt. This is an option if you are finding the repayments on the individual loans difficult to manage. However, because you are paying off this additional debt over the life of the mortgage - perhaps 20-30 years - the total amount of interest you repay will be much higher.
- It is a way of accessing a large sum of money in an emergency: If you suddenly need to access a relatively large sum of money to pay for an unexpected expense - for example, repairs to your home - and you are unlikely to be able to secure a personal loan for that amount, remortgaging is a way to get the cash.
Cons of remortgaging
- Repaying over a longer period increases the overall repayment: The main drawback to remortgaging to facilitate non-essential spending is it will be expensive over the long term. While your monthly repayments will be lower, you will still be paying off the debt until the end of the mortgage term, accruing a far higher amount of interest. Indeed, remortgaging can work out to be 10 times more expensive than taking out a shorter-term personal loan.
- You need to have sufficient equity in the property: It can 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 may have to pay additional 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.
- Not ideal if you are planning to move: Remortgaging 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.
- The debt is secured against your property: Those using a remortgage to pay off debts need to keep up with the repayments or risk losing their home.
Why should I consider a personal loan?
Personal loans can be used for anything from buying a car, settling debts or paying for a major event. Unlike remortgaging, 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 have any arrangement fees.
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. 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.
Pros of a personal loan
- Quick decision: The application process for a personal loan is less in-depth than for remortgaging and you won't have to wait the four to eight months that the average remortgage takes.
- The debt is paid off relatively quickly: The average term of a personal loan is one, two or five years. So, while the monthly repayments will be higher than if you remortgage, you will save yourself up to 25-years of interest payments on the loan.
- Your property isn't at risk: A personal loan doesn’t put your property at risk as most are unsecured. However, any missed payments or arrears will harm your credit score and make it harder to access other borrowing, such as loans or overdrafts, in the future.
- Higher monthly repayments due to the shorter term: If you are going to struggle to meet the monthly repayments, taking out a personal loan may not be a good idea. If you miss payments, you will damage your credit record.
- Restricted to a maximum loan of around £35,000: If you require a larger sum, a remortgage may be better, particularly if you have a large amount of equity built up in your property.
- Missed payments will harm your credit score: You may not be offered the headline rate and, as a result, could end up paying more than you initially thought for the loan.
Remortgaging vs Personal loan
|Interest rates||Depends on loan-to-value. Rates can be as low as 1.17%||Lowest rates start at 2.8%. Varies by lender, loan size and depends on credit score|
|Term length||20-35 years||
|Fees||Depends on the lender, but can be over £1000||Any arrangement fee is included in the overall APR|
|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. Most cards offer introductory offers, including interest-free periods, which can be a good way of getting your finances in order. 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 from the introductory offer to the pricey annual percentage rate (APR), as well as damaging your credit score.
To discover some of the best credit cards currently available, read our article: "Best credit cards in the UK".
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'.
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