A common method of making debt more manageable is to remortgage for debt consolidation. Many people choose to do so with their original mortgage lender, but this often leads to higher rates than they might find with another lender. Remortgaging for debt consolidation is a simple concept, but it can be a superb way to cut down your monthly outgoings and save money. Think Plutus can help with practical advice and guidance, and we’re just a phone call away.
What is debt consolidation?
When we say ‘debt consolidation’, we are referring to the process of merging multiple debts into one. The reason for doing this is to make your debt easier to manage, and it often reduces the monthly outgoings as well. Your existing debts could be unpaid credit cards, loans, or anything else you owe money on. Having to manage multiple monthly bills can be complicated and expensive, so by consolidating your debts you can shift the focus onto a single monthly payment.
Is it wise to consolidate my debts?
Without being able to assess your unique circumstances, it’s impossible to advise you on whether debt consolidation will be a good move for you. People are usually advised to consolidate their debts on the basis of the amount of debt they have, the number of creditors they owe and the levels of interest that accompany each debt.
If your debt primarily relates to credit cards, debt consolidation may well be a good move. The interest rates on credit cards tend to be high, so they are an expensive way to borrow money. Of course, it’s important to bear in mind that debt consolidation is only effective if you are able to stick to the plan and avoid building up any more debt.
Don’t think of debt consolidation as an easy way to get out of debt. It should only be a measure of last resort, and you should get a thorough assessment of the pros and cons alongside any pitfalls that might crop up.
Can I remortgage to pay debts?
You may be a candidate for remortgaging to pay debt, but this doesn’t necessarily mean it’s the best option available to you. Your financial options should all be assessed as remortgaging is not the right move for everyone. Consider the following key areas in your decision making:
Does your current mortgage deal allow further borrowing?
If you are currently paying off a mortgage, the term of your deal may not permit further borrowing. If you find that your existing deal prohibits any additional lending, you’ll need to try a new lender for your mortgage. If further borrowing is allowed under your current mortgage deal, check what costs and fees will be involved. The fees incurred for additional borrowing are often added to the initial loan total, so borrowing more will actually increase the overall debt you owe.
Do you have enough equity to remortgage?
Remortgaging to pay debt is only possible if you have sufficient equity in your property. Even if you are able to tick this box, you should consider all your options before deciding to remortgage. If, for instance, your current mortgage is still on 80% of your property’s value, a remortgage could be an expensive undertaking. Consider the following example to see how you can assess whether remortgaging for debt consolidation is viable.
- Remortgage LTV: 90%
- Value of property: £300,000
- Mortgage amount outstanding: £240,000
- Remortgage offer: £270,000
- Maximum consolidation amount: £30,000
You will be made aware of the relevant figures for your situation during the illustration of key facts.
Are you able to remortgage at this point in your mortgage term?
If you are currently in a fixed mortgage term for 7 years, but are only 3 years into that term, you will probably have to pay an early repayment fee. Ask your lender if they charge early repayment fees if you remortgage with another lender.
If you have passed your initial mortgage term, your current mortgage rates will probably be above average. This could be reason enough to remortgage in itself, as you may be able to get lower rates elsewhere and save money on your monthly outgoings. Always check the costs involved with obtaining a new mortgage.
Applying to remortgage for debt consolidation
The process of applying for a remortgage to consolidate debt is much the same as applying for any other mortgage. You will be subject to an affordability assessment and a credit check from the lender.
Remember, every lender has a unique set of criteria when they make their assessments. There are lenders who insist that you have a clean credit history, while others approve mortgages for applicants with severe credit issues.
The method of calculating affordability also varies from lender to lender. It’s realistic to expect lenders to provide up to 4x your annual income, though in some cases this number will be a little higher or lower, depending on the circumstances.
The mortgage experts at Think Plutus can explain all this in more detail and identify the lender that is the best fit for your unique financial profile.
Is it advised to remortgage to pay debts?
You are never short of choices when it comes to mortgages. It’s a big market filled with products that have a wide range of ever-changing variables and rates. This makes it difficult to know whether remortgaging for debt consolidation is the right choice. You need to weigh up the pros and cons to zero in on the right deal for you, as well as to establish whether a remortgage to pay debt will actually be beneficial to you. Financial decisions are always heavily dependent on your personal circumstances, but we can provide a generalised outline of the risks and benefits associate with remortgaging to pay debts.
What if most of my debt is from credit cards?
If you have the financial means to pay off your unsecured debts – which includes credit card bills – you are advised to continue making those payments as you are. If it’s viable for you, it may be a good idea to overpay, though you should check your financial agreements to see whether you are permitted to do so. It will probably work out best for you in the long-term to try to repay your debts without having to remortgage. You’ll find it difficult in the short-term, but the bigger picture is more important.
If you merely pay back the minimum amount needed for your credit card bills, your debt could be constantly growing. You should always pay back the balance and the interest accrued.
If credit cards make up the majority of your debt, you may be able to transfer the balance to a different credit card. By doing this, you may be able to switch to a credit card that has lower rates. Some credit cards even offer interest-free periods for new customers. This can help you reduce your monthly outgoings so that you can save more whilst paying off your debts.
Again, a remortgage to consolidate debt should always be a last resort. Think Plutus can help you find the best mortgage rates available to you and offer guidance on your options.
Benefits of a remortgage for debt consolidation
The primary benefit of remortgaging to clear your debt is that it reduces your monthly payments. A mortgage is a loan that you pay off over a predetermined time period. That period of time is usually much longer than with any other type of loan, such as personal loans or credit card debts. By stretching a debt over such a long time period, monthly payments are reduced and thus become more manageable. Consider the following example:
A personal loan of £12,000 to be paid back over 3 years with a 10% interest rate would mean your monthly payments are around £380 (more if there are additional fees attached). That same loan, paid back over a 15-year mortgage term with a 4% interest rate, would result in a monthly payment of around £90. Even with a 8% interest rate, the monthly payment would be approximately £115.
Risks of remortgaging for debt consolidation
Though your monthly payments may be significantly reduced, you will pay a greater amount in interest over the duration of your mortgage term. This is because, rather than paying the full loan back in 3 years, you will be paying it off over 15, 20 or even more years. This means you’ll be making interest payments for many more years, so in the long-term the total amount you pay is higher.
Another important risk is that, when you remortgage for debt consolidation, your home is used to secure the loan. All your unsecured loans, consolidated into one, will be secured against your property. If you fail to keep up with your mortgage repayments, you could find your home is repossessed. This is the main reason why remortgaging for debt consolidation is recommended only as a last resort. It will take discipline with your finances to keep up with repayments, and your home will remain at risk throughout the full term of your mortgage deal.
What other options are there for debt consolidation?
In many cases, a remortgage for debt consolidation will be the cheapest option available to you. If you’ve already ruled this option out, or it simply isn’t available to you under the terms of your current deal, another option would be to take out a second charge mortgage or secured loan to consolidate your debt.
Secured loans generally come with higher rates than mortgages do. Having said that, you can agree a secure loan with a long repayment period, not unlike a mortgage. Where this option is offered, you can spread the cost of repayments over a longer time period, meaning your monthly payments will be smaller. An experienced financial adviser will be able to help you assess whether this is a good option for you.
Another option is to use unsecured loans to consolidate your debts, rather than remortgaging. As a general rule, the rates associated with unsecured loans will be very high. This is because the risk the lender takes in approving the loan is significant, as it is not secured against any asset that would guarantee recovery of the debt. Lenders that give unsecured loans mitigate that risk by charging higher rates than you would see with other types of loan. You can also expect short time periods in which to repay an unsecured loan. Essentially, it means that higher levels of debt will cause your monthly repayments to be very high in comparison to a secured loan or a mortgage.
So should I remortgage or not?
If your aim is to spend more, a remortgage for debt consolidation will not be a good move. The honest truth is that you’ll suffer more in the long-term as you will probably generate even more debt. Some people find themselves in debt due to unfortunate events that they didn’t see coming. There’s no way to change the past, but you can take control of your future. Strict financial discipline is essential so you will have to refrain from spending money where it really isn’t necessary.
If you have found that your debt is spiralling out of control, it may be a good idea to get in touch with your creditors. They may arrange a formal debt management plan to help you get back on track.
Consider contacting your mortgage lender as well. They may be willing to extend your mortgage term, which will mean your monthly repayments are reduced. Your creditors may also allow payment plans to be set up. Planning and strategy are essential when you are trying to clear your debt, so consider the options available to you. We recommend speaking to a reputable financial adviser to get the benefit of knowledge and experience in making the right choices. If you do conclude that a remortgage to pay off debts, and debt consolidation is the best move, we can help you find the best possible deal to make the most of consolidating your debts. For expert mortgage advice tailored to your needs, Think Plutus and get in touch.