With mortgage rates at an all-time low and unlikely to rise any time soon, many borrowers are considering cashing in on the rising value of their property and increasing the value of their home loans to spread their investment portfolios. But is this a wise move, and would it be better to use the ultra-low interest rates on offer from many mortgage lenders to cut the time it will take to pay off your property debt?
We calculate the possible pros and cons of both decisions and what you stand to gain from them:
Be prudent and pay down your debts
Have you forgotten that the borrowing binge in the years up to 2007 was precisely what tipped the developed world into its worst-ever recession? To even contemplate going the same way all over again is madness.
The chance of this happening again is still looming over the world economy, so you would need to carefully weigh your needs and wants to decide whether this is really worth the risk.
Millions of borrowers languish on mortgages taken out years ago, despite the multitude of cut-price fixed and variable rate loans available from a wide range of landers.
If you do remortgage at a lower rate than your current deal, the most prudent option is to keep up your repayments at their existing level so you overpay every month. Then sit back and watch your total debt shrink.
But beware! Check the smallprint of your mortgage contract before overpaying. Most lenders will usually allow you to overpay 10% per year, but a minority of lenders impose strict penalties that quickly outweigh the savings.
If you have a lifetime tracker or a standard variable rate, your ability to make overpayments is probably unlimited, so make the most of it.
Take the devil may care approach and borrow more
Caution doesn’t reap the big rewards, does it? And with interest rates for homeowners as low as they are, borrowing really stacks up financially.
Not only that, your home’s worth so much these days that it deserves investment. Now’s your chance to build that extension or seriously upgrade the kitchen. Borrowing £100,000 at an easily achievable two-year fixed rate of 1.64% would cost less than £4000 in mortgage fees and interest costs over the 24 months of the fixed term. Of course, you’ll have to repay the capital, but think how much your home will have risen in value.
Naturally, there is a pretty large amount of risk in investing so much into a property you’re still paying off, but you can also consider the chance of buying something new and relatively cheap, upgrading what it has and going through proper maintenance so you can later rent it out for a steady supply of funds you can count on as long as you have tenants you can rely upon.
Research from broker Mortgage Advice Bureau shows investors are now applying for mortgages with £99,914 of equity under their belt, up by £13,289 when compared with 12 months ago.
The average property value among buy-to-let borrowers is just under £230,000, similar to the £231,000 sought by the average home buyer.
Once you have more than one property you may even decide to make a moving checklist, hire a removal service and deal with the relocation to a new home. Moving house may be exactly what you need if you want to take advantage of the wider choice you have in this manner, so you will need to consider your options and act accordingly. Article provided by: Rent a removal van Paddington.