Homeowner Loans vs. Remortgages: What’s the difference?

Loan

In addition to turning your home into your heaven on earth, redoing the kitchen, adding an extra bedroom, and fitting a new kitchen can increase the value of your home.

Homeowner loans or remortgaging are two of the most popular finance options for such improvements. But which is better for you?

In this guide, we explore the differences between the two loan types, look into their pros and cons and help you decide which is better for you.

The difference between a homeowner loan and remortgaging

With a remortgage, you’re replacing your current loan with a new mortgage loan. You can opt to stay with your current lender or move to a new one. Several reasons homeowners move to new lenders include:

  • To find a mortgage plan with better rates and flexible repayment terms, including the possibility of making overpayments and taking payment holidays.
  • The introductory mortgage offer has come to an end
  • To get extra funds against the property

On the other hand, a homeowner loan is borrowing extra funds in addition to your current mortgage. There’s no mortgage replacement. Reasons homeowners take this route include:

  • Home improvement
  • Debt consolidation

Generally, homeowner loans attract higher interest rates than remortgages. Homeowner loans are riskier. For instance, when a house is sold or repossessed, the mortgage gets priority over the homeowner loan. This means the funds from the sale are used to settle the mortgage first.

On the other hand, by remortgaging, you might pay a lot more interest because the payments are made over a long period. Taking another mortgage loan means you’ll take longer to pay it off.

Note: In both, borrowing is secured against your home. So if you fail to make regular payments, you risk having your home repossessed.

When a Homeowner Loan is a Better Choice

Your circumstances have changed since getting the mortgage. For example, you’ll have an easier time getting a homeowner loan if you are self-employed and cannot provide proof of income as per mortgage loan requirements.

  • You need money fast. The time it takes to process a homeowner loan varies from one lender to another. Generally, it’s faster than remortgaging.
  • You have a low credit score. If your credit score has dropped since you got the mortgage loan, you might have an easier time getting a homeowner loan. Some lenders specialize in bad credit loans.
  • If there’s a charge for early repayment. These charges are often more expensive than the interest in homeowner loans.

When Remortgaging is a better Idea

There are different situations when remortgaging may be a better idea. These include;

  • You want to borrow more money to fund a home improvement project – remortgaging will get you the cash at a competitive rate
  • Your fixed or discounted rate is about to end – most mortgage deals last between two and five years. After this time, most lenders revert mortgage terms to the standard variable rate. Unfortunately, this rate is often steep compared to new mortgage deals available.
  • You need a competitive rate – you can save a lot of money depending on your current rate or the rate you are about to jump to. However, before making an early mortgage repayment, check if your terms included an early repayment charge. If it does, do some quick math to decide if it’s cheaper to remortgage.
  • You are concerned the interest rate will increase – if the rates from the Bank of England increase, your premiums might increase as well.
  • Your home’s value has increased drastically – if the value of your home has increased since taking the first mortgage loan, you might qualify for a lower loan-to-value band. This means you are eligible for a lower rate.

The Remortgaging Process

The remortgaging process varies from lender to lender but often follows a general process, as explained below.

  • Step 1: Contact your current lender and ask for a redemption statement. This will tell you how much you owe in your current mortgage. It will detail the costs and fees included in repaying the loan
  • Step 2: Search for a remortgage option. You might find another lender cheaper.
  • Step 3: Complete the mortgage application. To make the process easier, have your bank statements and payslips in hand. Remember, remortgage approval; you’ll need to pass an affordability check and have a good credit score.
  • Step 4: Property is valued. The lender confirms your current property’s worth.
  • Step 5: A solicitor request the title deed. He will conduct a thorough check to determine there are no planned projects in the area that could reduce the home’s value.
  • Step 6: You receive a completion date. After approval, you’ll receive a date of when your existing mortgage shall be repaid, and the new loan takes effect.

Homeowner Loan Application Process

The homeowner loan application process is similar to remortgaging. After all, they are both taken against your home. After settling on the loan amount, search for a lender willing to meet your needs. It helps if you have your bank statements, wage slips, proof of address, and ID in hand for faster loan processing.

Your property might need to be valued. In most cases, an online valuation works well.

How much equity you own in your home

Home equity is the portion of your property that you own, which isn’t securing the loan. The value of your home three years back isn’t the same today. It might have increased or decreased. Request a local real estate agent to value your property or do an online comparative search to get a general idea.

Once you have an idea of your home’s current value, subtract the amount you owe and other loans you’ve secured against the property. This will give you the equity you have in the property.

If the property value is £200,000, and your mortgage balance is £80,000, and you have £30,000 owed in a homeowner loan, then the equity you have in the home is £90,000.

Conclusion

Clearly, your best option depends on your circumstances. If you plan on borrowing a small amount, consider getting a personal loan instead. They are simple and relatively easy to acquire.

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