Why you shouldn't rush to remortgage your home
Bingeing on cheap debt now and remortgaging your home can get you into trouble in future, says Alex Rankine.
Your home is not actually “a piggy bank made of bricks”, says Claer Barrett in the Financial Times. But booming property prices and low mortgage rates mean “many otherwise sensible people” are acting as though it is. UK Finance, which represents the banking and finance sectors, says that over half of homeowners who refinanced last year “withdrew additional equity from their homes”.
No wonder. “Rock-bottom mortgage rates” are back, says Helen Crane on thisismoney.co.uk. TSB has launched a two-year fix at 0.99% for remortgagers with a 40% deposit. It is the first such sub-1% fixed mortgage on the market since 2017. Those taking the 0.99% TSB deal are charged a £1,495 fee, so it can still prove cheaper to take a “higher rate with a lower fee”. Someone remortgaging a £300,000 property at 60% loan-to-value would be up £376 per year better off if they borrowed from Santander at 1.34% (fee £49) rather than taking the 0.99% TSB mortgage.
Splashing the cash
There are “three main risks” for remortgagers, says Barrett. First, interest rates rise, making the debt more burdensome. Second, “the asset you’ve bought falls in value”. Finally, a change in circumstances means “you can no longer service your debts”. For younger people who “do not remember the property crash or double-digit home loan rates of the 1990s”, the first two can be easy to overlook.
Increasing numbers of parents are remortgaging to help their offspring buy a house, reports Melissa York in The Sunday Times. Children under the age of 35 say they received an average of £19,000 for a deposit from the bank of mum and dad last year; 21% got more than £30,000. “Children will inherit that property anyway”, so why not make “that money… work harder earlier”, says Miles Robinson of broker Trussle. Lenders are tapping into this market with specialist products such as the Barclays Family Springboard Mortgage.
Home renovation is another booming area, says Stephen Maunder for which.co.uk. Mortgage broker Habito reports that 62% of Britons are planning home improvements this year. Many will pay with money they set aside during lockdown, but others are tempted to tap into the rising value of their home.
Remortgaging because you fancy a nicer kitchen is one thing, but be careful about selling it to yourself as an investment: going into more debt “in an attempt to increase a property’s value ahead of a sale is a gamble – and won’t necessarily give the uplift you hope for”.
A sub-1% mortgage rate certainly looks more appealing than the 3%-4% typically charged on personal loans. The longer term length of a mortgage also means lower monthly repayments. But the time taken to repay a debt is just as important as the headline interest rate. For example, £10,000 added onto a 19-year mortgage at 1.25% costs £1,240 in total interest. The same amount paid back as part of a five-year personal loan at 3.25% costs £848. The monthly payments from remortgaging are lower (£49 compared to £180 for the loan) but you ultimately pay more for that extra flexibility in your monthly budget.
Yet the remortgagers may still come up trumps: if inflation takes off and the Bank of England doesn’t hike interest rates then the mortgage borrower may find that the pounds they are paying back at the end of the mortgage term are worth rather less than they were when they borrowed them.