Remortgage

Remortgaging Tends to be a Pretty Misunderstood Topic

Remortgaging your home, also known as refinancing your mortgage, involves either adding additional amounts to the principal balance of your mortage, restructuring it to lower payments, or both.

Although remortgaging is a pretty simple concept, it does tend to be widely misunderstood by a lot of homeowners as well as a lot of personal financial advisors, who are often biased against it. Those who sell mortgages tend to be biased in its favor, not surprisingly since they earn their living talking us into them, but perhaps strangely, the view of mortgage advisors tends to be much closer to the truth than the general view, and remortgaging is often ta very good choice for a number of reasons.

RemortgageWe always want to be thinking clearly and pragmatically when we are managing our affairs, and this particularly applies to our financial affairs, as mistakes in judgement come with not only personal consequences but financial ones. There are all sorts of people out there that will tell us that remortgaging is something to avoid, and this avoidance also includes avoiding situations that are of clear benefit to us, which is never something we should practice.

While we do not want to paint a negative picture of this, on the other hand, we don’t want to paint too nice of one either, one that ends up extending our spending levels and our borrowing capacity beyond what it would be sensible to do. This can take us to a similar place that overspending our cash flow or borrowing too much by other means can, and the same temptations to spend are very much present and the consequences of these actions are just as meaningful, if not more so.

The goal is certainly not to look to pay down our mortgage as fast as we can, to the exclusion of other concerns, and we always need to take the overall picture into account when we manage our mortgage. We might think that this need should be obvious and transparent, but for whatever reason, a lot of people approach their mortgage as well as other components of their financial affairs somewhat in isolation, instead of seeking to better understand the overall picture and integrate our thinking toward the goal of seeing the best path overall.

Instead of looking at mortgage debt as a necessary evil that we need to take on in order to buy and maintain ownership of a home, we need to step back and understand what we are really managing with our home. Having the ability to remortgage means that our equity has grown enough that we can now tap into this, and equity equates to wealth, so we need to instead approach this from a wealth management perspective, much like we would with cashing in our other investments.

While it may seem nice to just watch our mortgage balances go down over time, and the value of our house go up, and resolve to just keep building this wealth independent of other financial concerns, if we put up a roadblock to using this when it makes sense to, we’re not going to be even entertaining our overall interests.

Remortgaging Can Be a Bad Thing, But Only if We Misuse It

There are people who see remortgaging overall as a negative thing, and will tell you that this should be avoided unless absolutely necessary, with that presumably meaning when you need to act in desperation. Clients often will be quite amazed at the benefits of remortgaging should the opportunity be presented to them in a time of need though, and this has saved people both a lot of money and in some cases their homes as well, although we always want to avoid going beyond the point of no return where your credit hits the skids and you cannot extract yourself from an ill fate even though you may still have the means to do so.

Starting with the perspective of our equity being wealth is actually an important step in coming up with the right mindset and understanding to execute a financial plan that will be in our best interests. If we instead just see this as borrowing money, with the view that borrowing should be avoided whenever possible, and then perhaps attach an even greater reluctance to borrow more against our house, this is going to leave us prone to making some mistakes, and sometimes some big ones.

Borrowing to buy a house is quite different from normal forms of borrowing. Most borrowing is done to facilitate consumption, where we get the money now instead of waiting so that we can enjoy the benefits of the things we will buy with the borrowed money now rather than later. This may be by choice or by way of need, but the benefits of this are confined to matters of personal gratification, which also includes borrowing to restructure debts that have accumulated by way of consumption borrowing.

We may want or need certain things now, and perhaps put them on a credit card, and then get a personal consolidation loan to reduce the interest costs. We might also restructure these personal loans into a bigger one, to perhaps spread the payments out over a longer period of time and better accommodate them.

When borrowing to buy a home, there is also an investment component to this, where our purchase won’t just be enjoyed, it will also provide us a source of wealth over time. This adds significantly to the appeal of home loans and also puts them in an entirely separate class among types of borrowing, and they must be then treated accordingly.

Comparatively speaking, home loans should be given preferential treatment over consumption borrowing, simply because home loans offer this other benefit. If we have a choice between buying a cheaper home and living more lavishly in it, or a better home where we’ll need to control our spending more reasonably, it’s just better to lean on the side of the one that builds wealth.

While consumption loans always come with a financial cost, what we pay to get the money now versus later, home loans are net positive, where we not only get the benefit of living in the home now, the consumption side, we also get capture the investment benefits, and the investment benefits alone make this all quite appealing.

This is especially important given that we are such poor savers and investors generally, and for many people, their home is their only major investment or perhaps their only investment period. We should actually use the word investment more than we do when we refer to purchasing a home and borrowing to get it, just like we would if we took out a loan to buy stocks, which would make the true situation at least a little more transparent.

Home Loans Create Wealth, Remortgaging Manages Wealth

After we have made our investment in our home, we also need to continue to understand this investment as wealth, our own money actually, and this is an important distinction that a great many people do not make properly. We’re not really borrowing in the normal way when we remortgage, we’re instead accessing our own money, even though there is an interest cost involved just like there is with all means of borrowing.

These interest costs do need to be accounted for though, in the same way that we would want to account for interest costs with any loan, and we still need to weigh the benefits of having the money now versus later, which we also need to do when we’re spending our own money that we’ve saved up as well.

Just like our own resources, we can spend the money that we have made from our home investment wisely or foolishly, but the fact that the money came from accessing our home equity is certainly not a negative in itself, compared to borrowing through other means. It is always better to borrow our own accumulated wealth in our home just from the fact that the cost of borrowing may be lower.

When people speak of the purported ills of remortgaging, it is not the remortgaging itself that is the culprit here, it is simply spending too much, either beyond our capacity or beyond what would be reasonable, all things considered. The future matters too, and we will get there soon enough, and it’s better not to make decisions we will come to regret because we haven’t accounted for it enough.

The temptation with remortgaging can be to use this as a tool to overspend, and the potential for doing this with remortgaging is certainly higher than using other means of borrowing to overspend, given the lower rates and the longer amortizations involved. We already struggle enough with overspending generally, and we want to avoid spending too much of our profits from our home ownership just like we should want to not spend too much of our earnings or savings, and instead be guided by what the best path would be for us overall.

Remortgaging here means adding to a current mortgage, as opposed to moving this debt to another home. That does involve a remortgage of sorts though, and may have both an investment and a consumption side to it, if we buy a more expensive home and also use the equity that we’ve cashed in from the sale of the old one to borrow more.

It’s the borrowing more though, the cashing in of our equity, that remortgaging generally involves, although sometimes we may need to just extend the amortization to make the payments more affordable.

We often will do both though, and when we remortgage, when we take out equity from our home, it almost always makes sense to extend our amortization as well, especially if this involves consolidating debt.

This other debt indicates a negative cash flow, where our income less our mortgage payment did not leave enough to get by on, and if our mortgage payment had been lower, we would have had more money to manage this other spending. A longer amortization does not mean it will take us longer to pay off our home loan, and it actually can allow us to pay it off faster, from the money we save from managing our other borrowing better.

However, if we set things too tightly, this will lead to higher interest costs for the consumption borrowing we need to make, compared to the lower costs of owing these additional amounts on our mortgage, and the difference in rates can be very significant.

Using Remortgaging Wisely

Aside from remortgaging to just extend our amortization, there are two main reasons why we remortgage, which is to borrow for purchases and to borrow to restructure existing debt. Given how much debt we have generally, it shouldn’t be surprising that debt restructuring is the main purpose here, although people will tap into their equity for all sorts of purchases.

Of these purchases, using the money to remodel your home is a popular one, and this at least adds value to the home and therefore can also be considered an investment, although we may not recapture the full amount in equity. Improving your home does add value though, and this at least builds some wealth, as opposed to other purposes which just provide enjoyment without any lasting benefits.

We do need to account for this in these decisions though, where we consider how much a project will add to the value of our home so that we can properly understand the benefits of lack of them. Remodeling that adds real value should be treated separately from doing this just to satisfy our personal tastes, which tends to build little or no wealth.

This does not mean that we should not undergo projects that suit our tastes more, but we need to understand that there are two components here, the investment side and the consumption side, and take the potential for both into account.

Using mortgage refinancing to restructure our current debts is, on the other hand, something should require little deliberation, as this is almost always a benefit. The only real exception would be when we take a bad financial situation and transfer it to our mortgage, where if we end up bankrupt, we are going to lose our home as well, where it would have been wiser to isolate the mortgage from these dire circumstances.

Otherwise, there are two main benefits to remortgaging for debt consolidation purposes, where we can both reduce our interest costs significantly and also improve our cash flow position to help avoid a recurrence of the problem. While we can often bail ourselves out of trouble by tapping into our home equity, we also need a good plan for the future, especially one that accounts for future borrowing needs.

Mortgage advisors do a good job with helping us manage the present, the bailout side of things, but often don’t give us much advise on managing the future. This isn’t their area of expertise though, and they are quite happy to see us again, back in the same trouble, when we don’t do well at this.

Managing the future here really only involves taking into account both the new mortgage payment and future borrowing as well, and making sure that we can manage both appropriately. If our mortgage payment is raised, and we were already struggling with the old one, we’re going to need to do more than just stick these debts on our mortgage if we expect our situation to improve longer-term.

Remortgaging really is about wealth management, and like all wealth management, how well we manage it is going to matter a lot. Managing the wealth in our homes is not a complicated affair at all, as it just involves spending our money wisely, something we should be striving to do better overall, as it all fits into one big picture and hopefully one that can be brightened by more sound decision making.

Remortgage FAQs

  • What does it mean when you remortgage?
    Remortgaging involves closing out the existing mortgage and granting a new one with new terms. The purpose of this is to improve the borrower’s financial situation in some way, whether that be to take out funds to pay off other debt and save on interest, to reducing one’s overall monthly debt obligations, or to extend the amortization of the mortgage.
  • How does it work when you remortgage?
    When you remortgage, you pay out your existing mortgage, which means that you have to apply for a new mortgage and get approved for the higher amount that you are requesting. You will be subject to the current rates of the day which may cause you to pay a higher rate or pay a penalty if it is lower, so these are considerations that need to be taken into account.
  • Is remortgaging bad?
    Remortgaging generally benefits borrowers by reorganizing their finances to save money on interest and to make payments more affordable. What led up to the refinance though, whether we have overspent or not, is another matter. People may also use refinances to spend too much, buying things that they probably shouldn’t.
  • How much does it cost to remortgage?
    The cost to remortgage differs quite a bit by lender and situation. There are setup costs to account for like legal and appraisal costs, plus whatever charge that the lender who held the previous mortgage may stack on. In cases where the rate of the new mortgage is higher, the additional interest costs need to be added in as well.
  • Should I remortgage to pay off debts?
    Provided that the savings from the lower rates on the debt that the refinance provides are greater than the costs, or if you need to lower your payments and this is worth the cost of the refinance, then it makes sense to take advantage of this. Refinancing debts with a new mortgage can provide substantial benefits in many cases.
  • Do you need a solicitor to remortgage?
    Whenever you set up a mortgage or other secured lending product, legal assistance will be required to place a lien on the property for the amount of the mortgage. With a refinance, additional legal assistance is required to remove the old mortgage off of the title so that it may be replaced by the new one. This work is generally done by paralegals nowadays.
  • When should I look to remortgage?
    The time to remortgage is anytime there is a significant enough benefit involved. Most people don’t really calculate refinancing benefits that often and usually miss opportunities if they are left to their own resources, and this is why lenders often proactively help borrowers discover whatever benefits may exist so that they can make a more informed decision.
  • Should I get my house valued before remortgaging?
    If you are looking to remortgage, you should have some idea of what your home is worth prior to having any discussion about it. People usually do not get it appraised for this purpose, as their lender will be charging them a property valuation fee anyway and it’s the lender’s appraisal that will count. Most people just look around the neighborhood or at their property tax bill.
  • Can I remortgage with bad credit?
    Remortgaging with bad credit is possible but not generally desirable due to the much higher interest rates that you will pay when you take out a new mortgage without good credit. Instead of improving a situation that needs improvement, a high interest refinance will tend to just make things worse, and the goal with refinances is to save money on interest, not pay more of it.
  • How long does a remortgage take?
    Remortgages tend to take a couple of weeks or longer depending on how quickly your lender can expedite your application and how simple or complex the deal is. If you’re staying with the same lender, the process will tend to be faster, since a lot of the information they need is right at hand. It still takes a considerable amount of time to complete though.
  • What happens if you remortgage your house?
    Remortgaging your house changes the structure of your mortgage and almost always involves adding more to its balance. This will often result in your payments going up, although if you are far enough into the original mortgage, and depending on how much new money is being added, you can add on debt as well as lower your monthly payments if desired.
  • Can you remortgage a house with no mortgage?
    Since remortgaging by definition involves replacing an old mortgage with a new one, you do need to have an existing mortgage to remortgage it. However, people who own their home free and clear can get a new mortgage to take out some equity out of their home, provided that they qualify to be approved for the mortgage.
Robert

Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: [email protected]

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