Things to consider before increasing mortgage borrowing

It is understandable why some people currently paying their lender’s standard variable rate would prefer not to make any long-term decisions at this time; however delaying may turn out to be a lot more expensive in the long run.

Standard variable rates are often priced higher than the prevailing interest rates for new deals, and there is no guarantee that current low rates will continue to be available for very long.

There are many things to consider when re-mortgaging other than simply whether the new interest rate is lower than the existing one. Consideration should also be taken in looking at the:

• Fees involved in re-mortgaging
• Flexibility of the product
• Duration of any tie-in period
• Overpayment allowances.

An increasing number of homeowners are borrowing additional cash when remortgaging, as they look to fund home improvements rather than step up the property ladder.

But is it a good idea to increase your mortgage debt by releasing equity to fund renovation work?

If you have a repayment mortgage then your monthly repayments will gradually reduce the outstanding loan over the term of the mortgage. This should mean that the loan-to-value (LTV) ratio is reducing over time, and therefore allow access to better interest rates at the point of remortgaging.

Major home improvements, such as an extension or loft conversion, can add significant value to your property. This kind of renovation work is traditionally paid for through savings or a personal loan, so why are borrowers now choosing to add debt to their mortgage instead?

Raising additional capital by remortgaging

For example, a borrower with a £150,000 mortgage and a home valued at £200,000 would have a 75% LTV at the point of remortgaging. They could potentially raise additional capital via their remortgage to complete some home improvements, and depending on the amount of extra money borrowed, this would increase their LTV ratio and therefore also increase the interest rate applicable to their whole loan. In the past this increase was more significant and therefore was often a deterrent against the additional borrowing.

Low mortgage rates have made the prospect of remortgaging upwards appear more attractive, but it’s worth considering alternative ways to finance home improvements before signing up to such a long-term commitment.

An unsecured personal loan of between £10,000 and £20,000 could potentially be arranged at an interest rate of around 3%, although this will depend on the status of the applicant. A £10,000 personal loan over a five-year term with an interest rate of 3% will cost around £180 a month. This will be fully repaid in five years' time and may therefore actually cost less overall than the above example of adding £10,000 to the mortgage balance, even though the monthly repayments for the unsecured loan are higher over the shorter term.

As can be seen above, the remortgage process involves a number of significant and important decisions, and making the wrong choice can be costly.

If you’re not sure what’s right for you, our mortgage advice service can help.

Your home may be repossessed if you do not keep up with repayments on your mortgage, or other loan secured on it.