Remortgaging benefits for you
Loans of any type consist of two parts: principal and interest. However, a mortgage is likely the most expensive loan you will ever take out. Because of this, interest rates can significantly affect the amount you will pay overall throughout the course of the loan. Take for example a typical thirty year mortgage. If you take out a mortgage for £200,000 with an eight percent interest rate you will pay over £528,000 in total by the time you finish paying off your loan. Several years ago an eight percent interest rate was not unheard of. Now, however, a four percent interest rate is more likely. If you take out the same mortgage on £200,000 but only with a 4% interest rate you will pay nearly £344,000.
The amount you pay in interest at the higher interest rate is over £300,000 the cost of the home while the 4% interest rate is only £144,000 over the cost of the home. Consider how much you could do with the difference. How much retirement would that garner you if you could invest that amount instead of paying it to your mortgage? The savings you can get simply from reducing the interest rate is staggering.
If you started out with a 30 year mortgage at a higher interest rate but can get a significantly lower interest rate, your monthly payments will decrease significantly. However, if you can still afford to pay the higher amount, you may want to consider decreasing the time to pay off your loan. Consider the same £200,000 loan over 30 years. Payments will be approximately £1,500 per month. If you are comfortable making that payment and can find an interest rate of 4%, your total interest payments will decrease to barely over £60,000 and you can easily pay off your home in half the time. In fifteen years you will have a completely paid of asset instead of continuing to pay on it for an additional 15 years.
For some, though, making the same monthly payments may not be feasible. Perhaps there was a change in family status. Perhaps there was a change in income. Regardless of the reason you may find yourself unable to afford the monthly payment or may find it difficult to do so. If you have your £200,000 home loan over 30 years at 8% and pay £1,500 per month you can benefit by remortgaging and save significantly. Payments will drop to under £1,000 saving you over £500 each month. You can use that money to become more financially secure or pay off other debts. Remortgaging may mean the difference between a stressful existence and one that is fairly comfortable in these situations.
However, you may have a different scenario where you have 15 years left on your mortgage. For the 30 year mortgage on £200,000 at 8% interest, assume you have paid on it for 15 years. After 15 years you will still have approximately £150,000 left to pay off with interest and principal. Instead of remortgaging for merely fifteen years on £150,000 you can also extend the mortgage. You can instead remortgage £150,000 for 30 years at 4% interest. Payments will then drop to approximately £700 saving you approximately £800 each month. Again, this difference can be significant if there is a loss of income.