4 Reasons to Consider a Home Loan Refinancing

Michelle Tuvey Michelle Tuvey | Loan Underwriter

Recent industry data shows that home loan refinancing continues to grow in the UK along with rising equity. In simple terms, a property owner's equity increases along with rising home values and every mortgage payment made. Over the last few years, we have seen equity rise substantially to the point that more homeowners than ever before enjoy equity in excess of 20%, which is generally the minimum for refinancing or getting a secured loan.

There are plenty of different reasons property owners consider home loan refinancing. Below are the top four. If you have been thinking about refinancing or taking a secured loan, just remember a few important tips:

  • Shop around to get the best mortgage deal;
  • Consider a lower loan-to-value ratio to get a better interest rate; and
  • Be prepared for an extensive valuation of your property.

1. Refinancing for Remodelling Purposes

The number one reason people look at home loan refinancing is to remodel their existing properties. In that way, they are using the equity they already possess as a financing tool to make their homes more comfortable, more liveable, and even more valuable. This kind of refinancing could be viewed as a double-edged sword of sorts.

Let us assume you have 25% equity in your property. You borrow just enough to remodel the kitchen and bathroom. You now have a home that is even more valuable than when you started, thereby giving you more equity as soon as the project is complete. Continuing to pay down your mortgage only causes your equity to grow. You have essentially used existing equity to create even more.

2. Refinancing to Consolidate Debt

The second most popular reason for home loan refinancing is debt consolidation. A property owner might completely refinance the entire value of his or her home, then use the difference between what he/she owed what was financed – which would be equal to equity – to consolidate higher interest debts like credit cards and personal loans.

This strategy may or may not be suitable depending on how much equity is available and how large the consolidated debt would be. In cases where refinancing is not a good idea, a secured loan is another way to consolidate debts. Getting a secured loan is a matter of taking out a second charge product rather than completely refinancing.

3. Refinancing to Get a Better Interest Rate

Mortgaging a property for the first time almost always involves getting an introductory deal. Those deals offer low fixed rates or discounted tracker rates for the first few years. Then the rates go up. Some people refinance their homes in order to avoid paying the higher interest rates that come at the end of the introductory period.

Having said that, refinancing this way is not always the easiest thing to do. It really pays to shop around to make sure you can truly get a better deal than what you would be moving to after your introductory term ends.

4. Refinancing for More Flexibility

Lastly, you might want to consider home loan refinancing if you want more flexibility. Perhaps you want to repay early without incurring a penalty. Perhaps you want to take some of your savings and use the money to offset the amount you owe on your mortgage (in order to reduce the total interest paid) with the goal of rebuilding your savings later as a result of lower monthly payments.

There are lots of reasons people choose home loan refinancing. If it's right for you, refinancing might be one of the best financial decisions you ever made.

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