Should we renegotiate our mortgage or take out a personal loan?

Q We are hoping to clear the remaining £48,700 of our mortgage. We envisage being able to pay it off in full in two years’ time.

We have £35,000 in savings, which we plan to use to pay off that much of our mortgage next month. This is because our fixed-rate mortgage will be due for renegotiation. This would leave us with £13,700 left on our mortgage.

We think the best thing to do is get a two-year personal loan and pay the whole mortgage off next month, leaving us with the personal loan of £13,700 to pay off over two years. This would mean, however, that we would have to pay about £600 to get out of our mortgage early.

Is there any reason why we should renegotiate our mortgage instead of getting the loan?
AO

A Yes, there are several reasons why you should remortgage rather than take out a personal loan. But first you should look at whether using your £35,000 in savings to pay off part of your mortgage is the best course of action (as should the person who has asked me whether he should use his £40,000 in savings to pay off his buy-to-let mortgage).

If using all your savings would mean that you had no financial cushion to fall back on in an emergency, using them partly to repay your mortgage is not a good idea. Using some of your savings to pay off some of your mortgage – while leaving a big enough emergency fund – could make sense. But it wouldn’t if your savings would be better used to pay off outstanding credit card debts or an unsecured personal loan, for example.

If you are otherwise debt-free and have a reasonable financial cushion in place, it makes perfect sense to clear £35,000 of your mortgage. But the way to clear your mortgage in full next month is not by taking out a personal loan, and certainly not by paying the mortgage off before the fixed-rate period has come to an end and so incurring an early repayment fee of about £600.

The thing to do is to remortgage with a lender willing to grant you a £13,700 mortgage with a term of two years. Given that the minimum term with most residential mortgages is five years, this won’t be easy. But according to Pete Mugleston of onlinemortgageadvisor.co.uk, it can be done. Short-term mortgages are available says Mugleston, and they “can be for as little as six months to two to five years. Lenders [all] have their own minimum terms, which vary from no minimum to a 15-year minimum.”

Lenders also vary in the minimum amount they are prepared to lend. Some put this at £25,000, while others are prepared to lend as little as £5,000. So to find a lender that can offer the two-year term you require as well as the relatively small amount you want to borrow, you could consider getting help from a whole-of-market mortgage adviser.

And in case you were wondering, the main reason a short-term mortgage is better than a personal loan is because the interest rates on personal loans tend to be higher – in some cases as much as 10 times higher – than mortgage interest rates.

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