Savings vs Paying Debts: Which is better when remortgaging?
If you’re looking to remortgage, you may be asking yourself whether it is better to save, or to pay off your debt. You may be wondering about how important your credit rating is, and how much it could affect the rate you are offered when you apply to remortgage. Will a bigger pot of savings stand you in better stead, even if you have outstanding debt? Or are you better off clearing your debt with anything you have put aside? We’re here to help you understand how to put yourself in the best position when applying to remortgage.
Let’s start with what remortgaging means. Remortgaging means switching from your current mortgage product to another mortgage product or even provider. People choose to remortgage for many reasons, but often it could help you pay your mortgage off quicker, improve your interest rate, lower your monthly repayment amounts, or free up money for home improvements, a big holiday or other investments.
Here are some of the most common reasons people remortgage:
- Your current mortgage deal is nearing its end, and you’re looking to avoid being put onto the lender’s standard rate.
- If you hold a fixed-rate mortgage, many individuals opt to remortgage at the conclusion of each fixed term, typically every 2-5 years.
- You’ve come across a better mortgage offer from another source (consider consulting a broker regarding potential early redemption charges and exit fees).
- The value of your home has increased since you bought iti, resulting in a more favourable loan-to-value ratio (i.e., the home’s value compared to your initial borrowing). This may help you secure a better interest rate.
- You’re looking to make a big purchase, such as for home improvement projects, a wedding or a big trip.
So is it better to save, or pay off debt? Let’s find out.
What do lenders look for when remortgaging?
It’s important to understand what lenders are looking at when you remortgage. Although borrowers may feel secure that they have a mortgage already, they could get turned down from better rates or lenders if their recent credit history doesn’t look good.
You can check your credit rating for free through a variety of online providers, and checking your credit score is quick and easy and provides you with a clear picture of how your lender assesses your financial situation.
Your credit report contains information about your past credit cards, loans, overdrafts and regular bills. Your lender will run a credit check to estimate if you will be able to repay your mortgage and the result will affect the remortgage deals you can access.
A strong credit score will reassure lenders that you are capable of making new repayments, whereas a weaker credit score could narrow down the options of products available to you.
If your credit score is not as high as it could be, there are several ways that you can go about repairing your credit score. Simple steps include:
- Spending regularly on a credit card, but ensuring you make at least the minimum repayments.
- Where possible, make larger repayments on your credit card than the agreed minimum.
- Making sure you are on the electoral roll.
- Avoiding using your credit card to withdraw cash.
- Closing any dormant or inactive credit cards or accounts.
- Reducing your debt as much as you can.
But I have a mortgage, does debt still matter?
Yes, it does, and we’ve outlined some of the reasons why below. But don’t despair, because there are simple solutions and ways we can support you in adjusting your finances and prioritising the debt that you pay off, particularly if you have savings, to secure the right deal for you.
When you already have a mortgage, the question of whether other debts still matter might arise. The reality is that the amount of debt you carry can significantly impact your ability to secure a favourable remortgage deal. Your lender will take into account:
- Risk factors – Whether it’s from unpaid credit cards, store cards, personal loans, or other sources, increased debt introduces risk factors that lenders consider when assessing your suitability for a remortgage, because they impact your ability to comfortably make the repayments.
- Credit score- Your credit score is crucial in securing a good remortgage deal, and outstanding debt will impact that, regardless of whether you have a mortgage currently. High-interest debt will have the biggest impact on your credit score, so it’s available to try and pay that off first.
- Affordability – Lenders calculate your affordability by looking at your income against your existing debts. If your debts have an impact on your affordability, they can affect how much you can borrow for your remortgage or even disqualify you from certain deals.
- Interest Rates – Large amounts of existing debt can increase your perceived risk in the eyes of lenders, which can lead to a reduction of products available to you. If you have debt, remortgage offers are likely to have higher interest rates, which may ultimately leave you deeper in debt.
But I have savings, does this not help?
When remortgaging, and it’s a question of clearing your debt vs savings, having a nest egg helps, but your money may be better spent paying off existing debt. While having savings is a good practice, to ensure you have a nest egg for if your circumstances change, when it comes to remortgaging, your lender will prioritise your ability to make your repayments, and how responsible you are at managing your outgoings. Which is why paying off debt often carries more weight with lenders when assessing your eligibility for a product as it reduces your financial burden, and therefore their perceived risk of lending to you.
Although it’s normally recommended that you pay off debt over building up savings if you’re looking to remortgage, you may find that it’s not required which is why it’s vitally important to speak to an adviser early.
Which debt is best to pay off first?
If you’re juggling multiple debts, it can be overwhelming to figure out which one to tackle first. However, there’s a general rule of thumb that can help you focus your efforts: We’d advise that you pay off the most expensive debt first. Often this is credit card debt and expensive loans, particularly pay-day, short-term loans.
If you have multiple debts, it’s worth spending some time gathering a really clear picture of which debts cost what, how frequent the payments are, and how much they could be affecting your credit score, depending on the nature of the debt.
If you have debt in multiple places, you may wish to consider consolidating your debt before applying to remortgage. Consolidating your debt involves combining multiple debts into a single, more manageable debt, often with a lower interest rate. This approach allows you to have a clearer picture of your monthly outgoings and makes it easier to focus on paying off your debt before you remortgage.
Pay debt then save
When it comes to remortgaging, the debate of paying debt vs. saving is important in demonstrating to lenders your current financial situation. In short, the general rule of thumb is that a person will be paying more interest on their debt than they would accrue by saving. While both are important for financial stability, it may make more sense to pay off your debt, particularly the most expensive debt like loans and credit cards, before you start saving.
Of course, it’s always best to check these figures as everyone’s financial situation is unique, but if you are paying more in interest on your debt than you could earn from growing your savings, you might be worse off if you start saving before paying off your debt. This is especially the case when the debt you have is very high interest.
Get expert, friendly advice from Lendese
If you’re looking to remortgage, and need specialist advice from one of our friendly experts, then we’re here to help. We’ll work with you to understand your financial situation, looking at any existing debt from loans, credit cards and your current mortgage rate, along with helping you prioritise whether you should be increasing your savings, or reducing your debt, depending on your very individual circumstances. We will look at your current mortgage deal and advise on the best products and support with the application process to get you the best deals.
We’ll also help you to understand and improve your credit score to optimise your chances of securing the best remortgage deal on the market.
If you would like to hear more from our remortgage experts, then please get in touch and one of our team will help you find the product and obtain the offer to support your long term plans. We offer appointments that work for you, with face-to-face conversations over a coffee, to speaking online or over the phone. We also offer evening and weekend appointments by request.
