The real cost of remortgaging

House prices are rising fast. Negative equity is soon to be a thing of the past. And interest rates are still at one quarter of their previous historical lows. What does that make you want to do? For a large number of people, the answer is, apparently, ‘remortgage’.

That’s partly to take advantage of low rates to get their monthly payments down in the short term. But, says Emma Lunn in The Guardian, it’s also about borrowing a little more against their houses to pay off their other debts – car loans, credit card debts and the like.

This isn’t as easy as it was in the bubble days (in 2006, around £35bn was withdrawn from housing equity in this way). But, assuming you can get past the barrier of the seemingly intrusive financial questioning that comes with getting a modern mortgage deal, is it a good idea?

The answer isn’t a simple one. That’s because the cost of debt isn’t just about the interest rate – it’s about the time you take to repay the debt.

Let’s say you have £10,000-worth of outstanding car loan on an interest rate of 6% payable over five years. Your monthly payment is £193 a month, and the total interest on the deal over the term comes to £1,600.

Now look at what happens when you add that £10,000 instead to your mortgage – on which there are 19 years remaining and on which you are currently paying 3%.

The monthly payments come down to £58, which is nice. But the total interest over the term? It goes up to £3,131. It rather looks as though you are better off sticking with paying off the car loan as it stands – or, if you have the discipline, taking the mortgage money, setting aside the savings, and paying down that part of the debt early. That’s particularly the case given that interest rates are unlikely to stay this low for much longer.

Unless you have found a way to lock in 3% for 19 years, it is inevitable that your mortgage costs will hit at least 6% before the end of your term, in which case the cost of your car loan paid back over 19 years will look pretty nasty (the interest is well over £6,000 if you assume an average rate of 6% over the term).

The debt might slowly become less in inflation-adjusted terms, but, unless Bank of England governor Mark Carney really has decided that inflation doesn’t matter, the interest rate will rise to reflect that. Given the choice, we’d still always pay our debts off in the shortest time scale possible.