We are still on the theme of remortgages here at The Mortgage Exchange. We talked about remortgaging to reduce monthly payments in our last blog – now we are talking about remortgaging to make home improvements.
Lots of us want to make changes to our homes as time goes on. We might want a new bathroom or kitchen. We might need a little bit of extra space so want to build an extension. The problem is few of us have the amount of money required for these changes to spare.
There are several ways you could raise funds to carry out the works , a home improvement loan with the existing lender, usually at a higher cost. Second charge borrowing if you are within a penalty period with your existing lender, personal loan or if you have deep pockets then savings. For the purposes of this blog we will concentrate on remortgaging .
Remortgaging your home will free up some of the equity* that has potentially built up in it.
*What is equity?
Equity is the share you own of the value of your home. E.g. if your home is worth £200,000 and your mortgage is for £150,000, your equity is £50,000.
Generally the equity available in your property increases over time. This can happen for two reasons:
- Appreciation of the value of your home.
- The value of your home remains the same but you have been paying off your mortgage debt (NOTE. this will not happen if you are on an interest only mortgage).
How can I access this equity?
Selling your property will release this equity but today we are talking about borrowing against your equity. This is can be by way of remortgaging or second charge borrowing , for the purposes of this blog we are looking at the remortgage option.
How can I do this?
You take out a new mortgage that is larger than your existing loan. For arguments sake lets say that you have £100,000 left that you owe to your existing mortgage lender. You then take out a new mortgage of £120,000. This leaves you with £20,000 extra (although bear in mind that there will be fees that will eat into this).
I want to make home improvements – should I remortgage to do this?
Look at your equity:
- Work out the value of your home against how much of your mortgage you still owe.
- Look at how much your home has increased in value. Make sure you borrow proportionately with how much your property has gone up in value. You need to be able to afford to pay it back after all!
- Don’t bank on the value of your property increasing further – this would be taking a risk.
Look at the cost:
- Look at how much your monthly mortgage payments are at the moment. Look at what they are going to increase to. Are you happy with paying more?
- Look at how much more interest you are going to be paying over the lifetime of your mortgage.
- Remember to take into account any fees involved in exiting your current mortgage and setting up a new one. If there are any penalties to come away from your existing lender then you may be better suited to a
- Look at where mortgage rates currently are. Are they likely to go up in the future? If so now could be a good time to remortgage – before they go up!!
Your circumstances will dictate which is the correct way to go but to make sure you go down the right route – make an appointment to come and see one of our advisers. We will be able to help you make the best decision for you.