The dangers of remortgaging to free up cash

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The dangers of remortgaging to free up cash

If your home is worth considerably more than when you took out your mortgage, it may seem sensible to increase your loan to pay off other debts, fund improvements or even treat yourself to something you’ve always wanted.

But you could be making a big mistake.

Even if you remortgage to a lower rate of interest, you may not be making best use of your money. So ask yourself:

Is it really worth it?

If you want the money to clear other debts, take a few minutes to compare the cost of the different types of borrowing.

If you owe £5,000 on a credit card with an interest rate of 16 per cent, for example, it might seem like a no-brainer to add it to your mortgage, where you could pay around 6 per cent.

In fact, over a standard mortgage term of 25 years, it would cost £9,660 to clear that £5,000 because of all the interest you would rack up.

If, on the other hand, you stuck with the 16 per cent card and paid it off over five years, it would cost just under £7,300 because you would be borrowing over a far shorter period.

And if you moved the debt to a low-cost, unsecured personal loan, it would be cheaper still. Borrowing at 7 per cent over three years, the total cost would fall to under £5,560.

Better still, switch the £5,000 to a zero per cent interest credit card and clear it within the offer period, and you would pay nothing extra at all apart from the transfer fee.

What value home improvements?

If you want the money to improve your property, ask a couple of estate agents how much your proposed changes will increase its value.

You may change your mind about borrowing £10,000 to install a new kitchen, say, if it will add only a couple of grand.

Spend in haste...

If you’re planning to splash the cash on a dream holiday, car or other ephemeral treats, think doubly hard about whether it’s wise.

How will you feel when you’re still repaying the debt years after the trip is forgotten or the car has been scrapped?

If you’re determined to go ahead, consider a personal loan instead.

There may be little difference in the interest rate, but because the term will be much shorter, you’ll end up paying considerably less.

To find out more, visit www.moneysorter.co.uk/loan/

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Value of Property	£
		(eg 125000)

Borrow How Much?	£
		(eg 92500)

Your Mortgage Type

First time buyer?		Yes No
Have you found property?		Yes No
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