There are many reasons to remortgage or extend your mortgage, but they all come down to the same thing: you need money, and your home is an affordable way to get it.
Both remortgaging your home and extending your mortgage are valid options to get the liquidity you want. However, they work differently and have different costs that you need to know in order to choose the solution for you.
Why extend or remortgage your mortgage?
Whether you extend your existing mortgage or remortgage your home, you can obtain more money and usually on better terms than with a personal loan. As you know, mortgage interest rates are significantly lower than those of other loans. Therefore, perhaps the best option for you is to extend your credit line through an operation such as the one mentioned above.
Which of the two options is best for me: remortgaging or extending the mortgage I already have?
As always with questions about a major investment (in which you have to make calculations that will be very different in each personal situation) the correct answer is: it depends. Therefore, it is advisable to clearly explain each option in detail, so that you can assess which option is most interesting for you.
The bank may only offer one of the two options to get the financing you need and you won't have much choice.
Mortgage extension: what it consists of
Broadly speaking, the extension consists of increasing the loan you have already granted. You do not need to cancel your current mortgage. For example, if you had a mortgage of 120,000 euros, you can increase it to 150,000 euros.
However, if you choose this option, you should know that you will probably pay more instalments each month, although you can also negotiate with the bank to extend the repayment period of the loan. If you had a 25-year mortgage and have been paying it for five years, you can extend it for another five years to pay the same instalment each month.
But be careful! Not all mortgage extensions are intended to increase the capital. You can only extend the term. You may be going through a difficult financial situation at a certain time and, then, before defaulting on a payment, you negotiate with the entity to extend the number of years by reducing the volume of the monthly payment.
In this way, you should know that the mortgage extension can be either by increasing the borrowed capital, or by extending the term without asking for more money or, finally, by combining both things.
What are the costs of extending a mortgage?
Extending the mortgage involves carrying out a new appraisal of the property, which will be the responsibility of the entity.
The novation fee (change in term, interest rate, margin or revision of the conditions of a mortgage that occurs once it has been formalised) should also be taken into account. This fee will be paid at the time the deeds are modified, which must be done before a notary, which will also involve notary fees, management and registration of the extended mortgage in the Property Registry, although these last expenses will be borne by the financial institution. As a user, you will only have to pay the appraisal and the novation fee.
On the other hand, the amount is a percentage that is applied to the amount that we still have to pay on the mortgage loan and usually ranges between 0.1% and 1%.
The financial institution will have to pay the Tax on Legal Documents when modifying the contract clauses to extend the mortgage. In this case, we will have to pay a tax of between 0.5% and 1.5%, which will be applied to the mortgage liability of the added capital, although the percentage varies depending on the autonomous community in which we reside.
Advantages and disadvantages of extending the mortgage
The advantages are the possibility of extending the credit line at a lower cost than granting a personal loan. Thus, if you need liquidity, it may be the most interesting option you can select. In addition, the same contract is maintained and the process may be simpler.
In terms of downsides, another aspect to consider is the potential impact on the overall length of the loan. Extending the mortgage can result in a longer borrowing period, which means paying more interest over time, even if the monthly payments are more manageable in the short term.
Remortgaging your home: what it entails
The other option we can consider if we need more money for something is to remortgage, which is nothing more than cancelling the first mortgage we have and taking out a completely new one.
The amount of this new mortgage will be equal to what we have left to pay on the first one plus the amount of money you want to request.
The initial procedure is similar to the previous one, since the entity will have to assess your financial situation and your ability to respond to the new mortgage. The procedure will be approved or not according to the criteria of the bank. What changes slightly are the steps to follow and the associated costs.
Now let's consider the associated costs, which are higher compared to a simple mortgage extension, even though these are covered by the financial institution. However, in certain situations where significantly more funds are required and the conditions of the new mortgage are considerably better than those of the original mortgage, it could be more beneficial in financial terms when doing the calculations.
What are the costs of remortgaging your home?
Since this operation involves two steps (cancelling the mortgage and taking out a new one) it also involves more expenses.
This means that, if there are cancellation fees, the cancellation fee will have a cost in addition to other associated expenses. They are calculated as a percentage of what we have left to pay.
In addition, the public deed of cancellation of the mortgage loan must be signed, which involves notary, management and registration fees.
Advantages and disadvantages of remortgaging your home
The advantages are focused on the amount to be financed. For example, if you want to open a new business or have to face a high payment, it may be the best option. But, not only that, it may also be the best decision if the conditions of the new mortgage are better.
If you had a fixed-rate mortgage at 5% and the new mortgage is at 3%, it is certainly an option to get better conditions.
On the downside, remortgaging also has its costs. So much so that the interest savings you can make may not compensate for the high costs. But, as each situation is different, it will be up to you to know which is best.
Conclusions on extending a mortgage or remortgaging
In short, remortgaging the house and extending the mortgage we have on it are two options we have to obtain financing under more advantageous conditions than in the case of personal loans. Or they can be the option to finance the purchase of a second additional home.
However, it is very important to do calculations, because both options have associated costs, so it is advisable to carefully evaluate all the alternatives to choose the option that best suits our circumstances.
