Tim Leonard
If you have several different debts, remortgaging could be a way to help pay those debts off and make them more manageable. However, while there may be benefits of remortgaging for debt consolidation, it isn’t a decision to be taken lightly.
Read on to find out how remortgaging to consolidate debt works and the things you must consider.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it
What does remortgaging for debt consolidation involve?
Remortgaging involves switching your existing mortgage to a different deal. But if you have enough equity built up in your home, you may be able to release some of this value when remortgaging to raise funds to pay off other debts, such as personal loans, credit cards, overdrafts and payday loans. Essentially, you’re borrowing more on your mortgage to pay off what you owe elsewhere.
When applying to remortgage, you can ask to borrow an amount which will cover your outstanding mortgage balance, plus the amount you need to clear your debts. You may want to remortgage with the same lender or it’s possible you could find a better deal by looking elsewhere to a different mortgage provider.
» MORE: How to remortgage to release equity
Should I remortgage to consolidate debt?
There can be some benefits of remortgaging to consolidate debt but there are some important considerations to take into account too.
Pros of consolidating debt into a mortgage
Some of the main advantages of remortgaging for debt consolidation include:
- Bringing your debts together can make it easier to manage and monitor what you owe.
- It may mean you only have to make one repayment each month to your mortgage lender, rather than having to pay multiple lenders.
- Depending on the interest rates you currently pay on your debts, and the remortgage rate you can get, you could reduce your total monthly outlay on debt repayments.
- You’re making use of the equity built up in your home to help pay off your debts.
Cons of remortgaging for debt consolidation
Some of the potential disadvantages of consolidating debt using a remortgage include:
- You’re increasing the size of your mortgage, which may mean it will take longer to pay off.
- Depending on the mortgage rate you can get, the total you spend on debt repayments each month could rise.
- Even with a lower mortgage rate than you’re currently paying on your debts, the longer time it usually takes to pay off a mortgage means you could still end up paying more interest overall.
- Because you’re unlocking equity from your home, you may move to a higher loan-to-value (LTV) bracket where mortgage rates tend to be more expensive.
- Taking out a new mortgage means there could be remortgage costs to pay, which you must take into account.
- If you’re still in the initial rate period of your current mortgage deal, there may be significant early repayment charges if you want to leave the deal early.
- It’s not a certainty that you’ll be offered a new mortgage or the larger mortgage amount you need.
- The remortgaging process can take several weeks.
- You’re adding to the debt secured against your home, which could be repossessed if you fail to keep up with the repayments.
» MORE: How remortgaging works
Can I remortgage to pay off debt?
Whether remortgaging to consolidate debt is an option open to you will depend on several factors.
The amount of equity in your property
The more equity that you have in your home, the more a lender may let you borrow. Subtracting your outstanding mortgage balance from the current value of your property will give you an idea of the house equity you have. Equity accumulates if your property value increases and as you pay more off your mortgage.
Affordability
You will only be offered a mortgage if a lender is reassured that you can afford to pay it back. Because you’re increasing the size of your mortgage, your monthly mortgage repayments will rise, unless you find a lower rate that effectively cancels this out. However much your new repayments are, you must prove to the lender that they are affordable. Your income, outgoings, debts and employment status may all be taken into account when assessing whether you can afford the repayments on a mortgage.
Your personal situation
A lender will assess your financial situation, including income, expenditure and credit score if you’re remortgaging and borrowing more to pay off debt. The extent of your current debts will be a factor too, along with your employment status, including whether you’ve recently changed jobs or are self-employed. Depending on the lender, there may also be an upper age limit for remortgaging or a time by which you need to have repaid your mortgage in full.
Your loan-to-value
Your loan-to-value (LTV) ratio is important in determining the mortgage rates available to you. Dividing the total amount you want to borrow through your mortgage by the current value of your home will give you your LTV. Generally, the best mortgage rates are reserved for those with lower LTVs. In turn, this means that if you’re adding to your mortgage, you could end up in a higher LTV bracket, where rates may be more expensive.
» MORE: See current mortgage rates
Is it a good idea to consolidate debt with a mortgage?
Remortgaging for debt consolidation may be worth considering if you have several different debts and a reasonable amount of equity in your home. If remortgage rates are lower than the interest rates you’re paying on your other debts, remortgaging may reduce the amount you pay out in monthly debt repayments combined.
Consolidating debt by remortgaging may also allow you a longer timeframe to pay back your debts. However, the flipside of a longer repayment period is that you could end up paying more interest overall, even if you remortgage to a lower rate. You’re also adding to your mortgage debt, and if you fail to make your mortgage repayments there’s the risk that your home could be repossessed. Getting mortgage advice can help make sure you’re making the right choice.
You should also consider the alternatives first, including other types of debt consolidation loan, or a balance transfer to a lower rate credit card.
When might remortgaging to consolidate debt be a bad idea?
There are some circumstances when consolidating debt through remortgaging may be less likely to be a viable option.
Your other debts are small
If the debt you want to consolidate is relatively small, it may not be worthwhile remortgaging to pay it off. Taking out a new mortgage deal can typically come with fees and charges that simply wouldn’t be worth paying. Check if there are charges for paying off the debt you want to consolidate too.
Early repayment charges apply
If early repayment charges are payable for exiting your current mortgage deal to remortgage, these have the potential to add up to significant amounts of money. This is because such charges tend to be calculated as a percentage of the mortgage you’ve still got left to pay. Potentially coming in as high as 5%, it means early repayment charges could easily total thousands of pounds.
» MORE: When can you remortgage?
You don’t have much equity
If you’ve only recently started buying, or property prices have fallen, you may not have much equity in your home to tap into. This could hamper your ability to borrow more to pay off other debts. If it is possible, you’ll probably be borrowing at the highest LTVs, where mortgage rates tend to be highest.
» MORE: See the latest UK house prices
You plan to borrow more
If you are consolidating existing debts with a mind to taking out further loans, this is unlikely to be a good idea. It’s important to try and avoid accumulating more debt once a consolidation has taken place, as ultimately this will only increase the burden on your finances.
How easy is it to remortgage for debt consolidation?
If you have a large amount of equity in your property, a high income, a good credit score and only need to borrow a small amount more, it could make it easier to remortgage for debt consolidation. However, if you fall short on any of these factors, lenders will be less likely to offer you a mortgage.
Can I remortgage to pay off debt with bad credit?
It’s likely to prove more difficult to remortgage for debt consolidation if you have bad credit, though not necessarily impossible. If you’ve missed loan repayments in the past, or ever had a County Court Judgment (CCJ) or been declared bankrupt, lenders will question your reliability as a borrower. If your credit rating is under par, taking steps to improve your credit score before trying to remortgage could help.
Certain specialist lenders may be more willing to consider your application, but the interest rates you’re offered are likely to be higher than if your credit was good. There is also considerable risk attached to securing debts that you may already be struggling to pay off against your property. Not least, there’s the possibility your home could be repossessed if you fail to keep up with repayments. If you do consolidate debt, it’s also important to try and avoid taking on further debt, because this will add to your financial burden. You may want to seek advice from a debt charity if you’re struggling with debt.
» MORE: How to get out of debt
Alternatives to remortgaging for debt consolidation
Before deciding to remortgage to consolidate debt, it’s important to consider if there are better options. These may work out cheaper and mean you don’t add to the debt secured against your home.
If you have credit card debt, switching to a 0% or lower-interest balance transfer credit card may give you the breathing space you need to carry on paying off what you owe without remortgaging. Or if bringing your debts together in one place is a priority, a personal loan could fit the bill.
A secured loan – sometimes called a homeowner loan – offers an alternative way to tap into the equity in your property and consolidate other debts, but comes with the same repossession risk as remortgaging if you fail to make repayments.
Another route to avoid remortgaging could be asking your current lender for a further advance on the mortgage you already have. The rate on the advance may be different, but you can save on remortgaging fees and retain the rate on your original mortgage if it’s good.
And if you’re struggling with debt generally, the answer may not lay in any of these options or remortgaging to consolidate debt. Speak to your lenders to explain your difficulties and see what help they can provide. And consider getting guidance from one of these debt advice services:
- Citizens Advice
- MoneyHelper (formerly The Money Advice Service)
- National Debtline
- StepChange
- The Money Charity
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