People remortgage for many different reasons. It could be to secure a better interest rate, to shorten or lengthen your mortgage term, to move onto a fixed rate mortgage or to pay off a lump sum of your mortgage. You might also choose to remortgage to pay off debt.
Like many homeowners, your home is likely to have gone up in value in recent years. Remortgaging can allow you to release cash from the equity in your property. Equity is the difference between what your house is currently worth and what you owe on your mortgage. You could put this cash towards home improvements, a new car, a wedding or in this case, consolidating debt. This might seem like easy money, but will remortgaging to consolidate debt really put you back in the black?
What is debt consolidation?
Let’s say for instance that you have a couple of credit card and store card debts, and a loan outstanding. Each month, you are making individual payments towards reducing these debts. By consolidating, you are combining them all into a single loan to one lender. The theory is that you will end up paying less each month in debt repayments, taking away some of your monthly financial pressure.
Having debt can eat away at you and accumulating interest on these debts can make the situation feel out of control. It might seem like the easy option to ignore debt, but this is never a good idea. Consolidating it can sometimes be a good alternative solution to make money feel manageable again.
This might all sound pretty simple, but debt consolidation is not always going to be the easy option. Alongside the short term benefits, there are pitfalls that come with it that you should be aware of.
How can remortgaging help?
If you have accumulated debt, you may be able to release some cash from the equity that has built up in your home since you purchased it. By remortgaging, you can consolidate most or all of your outstanding loans into a single loan secured against your house.
For example, let’s say you have a £100,000 mortgage. If you wanted to release £10,000 of equity from your home to pay off your debts, you would then need to take out a new mortgage for £110,000. Whilst it may seem like you have paid off your debts, you have actually moved those debts onto your mortgage instead. Consolidating your loans does not reduce the amount you owe, it just restructures it in what might be a more efficient way.
Is remortgaging to pay off debt a good idea?
Possibly. This will depend a lot on your individual circumstances, such as:
- How much debt you have
- How much interest you pay on your various debts
- Whether you have sufficient equity in your property
- Whether you can afford your current debt repayments
If you have a lot of outstanding debt, consolidation could be a good idea. Credit and store cards for example are an expensive way to borrow money with generally high interest rates – particularly compared to mortgages. Mortgage rates have fallen to record lows in recent years, and consolidating your debts into a remortgage would almost certainly reduce your monthly repayments and interest costs in the short-term, making it more manageable. In the long-term however, the total credit charges could be higher. This is because mortgages are typically structured over 20-35 years, so you would be repaying your current debt for a much longer time.
Remortgaging to pay off debt will only be beneficial if you don’t go on to run up more debt in the future. Debt consolidation can be beneficial once or maybe even twice but remember, you are effectively storing up debt as opposed to solving it.
What to consider before remortgaging to pay off debt
It is so important to look at the bigger picture when thinking about remortgaging to pay off debt. There are a few things to consider before making this move, because it is not as straightforward as it might first seem.
There are costs involved with remortgaging which you should account for. These might include deeds release fees, legal fees, valuation costs and potentially early repayment charges. If you aren’t sure how much money to allow for these costs, get in touch with a mortgage advisor who will be able to help you plan for this. You may be able to add some of these costs onto your remortgage if you are unable to pay them upfront. Bear in mind though, this will of course increase your overall debt slightly.
It’s important to remember that by consolidating debts onto your mortgage, you are bringing your property into the equation. Generally, your credit/store cards and other loans will be unsecured, but by moving them onto your mortgage, this turns them into a secured debt. If you fail to keep up the new mortgage repayments, the lender could repossess your property and you could lose it. Is consolidating your debts worth putting your home at risk?
Lastly, if you are in debt, then there is a possibility that your credit rating will have been negatively affected – particularly if you have a history of missed or late payments and arrears. This might make it difficult to get a good remortgage offer. Don’t worry though – it is still possible to be accepted, particularly with the help of a mortgage advisor. We have plenty of experience in helping people remortgage with bad credit.
If remortgaging to pay off debt is something that you are considering, it’s really important to speak to a qualified mortgage advisor such as us here at Mortgage Light. We’ll be able to assess your situation and explore the options available to you to help you deal with your debts in the best way. If you would like some advice and would like to speak to one of our remortgage specialists, please get in touch.