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Remortgaging to pay off debt: Is this an option?

A man worried about debt with head in his hand

Choosing to use the equity in your home to consolidate debt is a possibility and can be an attractive option if you have high-interest charges and more expensive debt, like personal loans or credit cards with significant monthly payments.

A debt consolidation remortgage, where you take out a new mortgage to pay off unsecured loans or credit cards, can in some cases reduce your total monthly outgoings. However, before embarking on this process, it’s important to understand what’s involved and consider the advantages and disadvantages compared with keeping unsecured debt.

When remortgaging to pay off debt is a good option

In an ideal world, where you can qualify for a low-interest rate remortgage and have significant equity in your property, a debt consolidation mortgage may be a suitable option.

It’s all a question of balance and making sure any debt you may have is at the lowest possible interest rate to help you pay it off quicker – and often a mortgage is the best way to achieve this, particularly if you do have plenty of equity.

However, it is important to recognise this may result in a longer term on your mortgage and therefore more interest is paid over the years, compared to not consolidating debts.

When mortgage rates are low, this can work in your favour and mean you don’t necessarily need to secure existing debts against your home, as simply switching to a better deal can free up surplus cash to be used towards paying off your other debts quicker. Shopping around may mean you can secure a better mortgage deal than keeping your existing mortgage arrangements.

You may also be able to borrow more than what would be possible through a personal loan.

Debt consolidation remortgage could be the best way forward if your current unsecured debts are subject to high interest rates, such as credit cards, thereby reducing your monthly repayments.

However, be aware of possible fees such as early repayment charges. Talk to a mortgage adviser here at Mortgage360 – we can assess your situation and give you clear advice.

When it’s not a good option

If you’re unable to pay the resulting new mortgage

Consolidating debt into one single payment as a secured debt can be a positive way forward. However, it is important to remember a mortgage is secured on your home, which could be at risk of repossession if you find yourself in a position where you cannot keep up the repayments in the future.

In addition, whilst the initial move may have its attractions to pay off debts, you should also factor in the likelihood that you will probably be paying the debt back over a longer period, so the total interest you pay over the term of the mortgage may end up being more.

Add into the equation issues like early repayment charges with your existing lender, valuation and legal fees, and the sums may mean that it is not a cost-effective solution overall in either the short or long term.

There could be significant penalties for switching

If you are looking to remortgage and release equity before your current fixed-rate mortgage comes to an end as per your initial agreement, for example, you may be subject to penalties such as early repayment charges, which will impact on the benefits of the move. Talk to us here at Mortgage360 to ascertain exactly what’s right for you.

High legal and valuation fees

Bearing all of this in mind, could remortgaging at a lower interest rate be a beneficial step to free up funds to clear debt?

You should also factor into your decision the potential for additional fees involved, such as legal fees, valuation fees and arrangement fees as part of any remortgage application.

Major considerations

Having considered all of the different elements of the decision, it’s also worth thinking about how debt can impact you. Having single mortgage payments to make each month to one company can reduce the amount of financial juggling you have to engage in, reducing stress, time and administrative responsibilities to manage everything.

Reducing your monthly outgoings may prove to be more important to you than the total amount you have to pay back over time and how cost-effective the change proves to be in the end, particularly if you have a secure job with the prospect of more money over the years ahead.

Ask yourself these key questions;

  • Will a debt consolidation mortgage improve your financial situation?
  • Could a switch in lender without increasing your borrowing be possible and if so, how much would this generate to go towards clearing your unsecured debt?
  • Can you afford the new monthly mortgage payment?
  • How much more are you likely to pay over the years?
  • What will the initial costs and fees be?

Your home could be repossessed

Remember any mortgage is secured against your property and your home could be at risk if you increase the amount of debt secured against it and find yourself unable to keep up the increased monthly repayments.

You’ll likely pay more interest

It will probably take longer to pay off the debt. Your overall monthly outgoings may be lower in the short-term, but the total amount of interest which you pay back over the term of the new mortgage is likely to be more.

Could there be better options?

If you have concerns, it’s worth investigating the potential costs of other arrangements such as 0% balance transfer options on a balance transfer credit card and an unsecured loan to repay debts – which won’t put your home at risk.

Eligibility criteria

Just like any other mortgage product, your suitability for credit according to your credit file and the amount you will be able to borrow will vary from lender to lender, dependent upon their criteria.

The amount of equity you have in your current home will also be a deciding factor. You will also be subject to the same affordability checks you were subjected to when you took out your original mortgage.

Even if you don’t have a large amount of equity, a specialist mortgage broker can help you assess the potential suitability for a remortgage, and although this may involve paying higher interest rates, there could still be savings to be made.

Could a further advance be an option?

Also worthy of consideration is a further advance mortgage. This is where additional borrowing is taken through your current mortgage lender and will be at a different interest rate to your current mortgage deal.

Further advance mortgages are usually requested for home improvements and may not be the right fit for debt consolidation. However, this approach could also allow you to reduce monthly repayments across a longer term and can avoid some of the extra costs involved in a remortgage, such as legal fees.

How to increase your chances of getting a mortgage to pay off debts

Firstly, you’ll need to have some equity in your existing property – in other words, have paid off some of the capital and/or benefited from an increase in the value of your home. The greater the equity, the more attractive your application for a debt consolidation remortgage will be.

Remember this is a remortgage – if your situation has changed since you were approved for your original mortgage, this will be taken into consideration. If you have become self-employed, changed jobs, become significantly older (impacting on the potential term for your mortgage) or increased your number of dependants, this may affect your application.

Affordability checks have become more stringent too. However, there are some simple steps you can take to increase your appeal to potential mortgage lenders, such as;

  • Don’t apply for credit in the months leading up to your application; this can impact your credit score,
  • Always make your credit repayments on time so that you have a clean credit history,
  • Make sure you’re on the electoral register,

None Judgemental advice

Deciding to remortgage to pay off current debts is a serious step and it’s important to enlist the right professional help and advice to make sure that this is the most suitable option for you before you proceed.

Talk to us here at Mortgage360. We understand the pressures of debt and modern life and will listen to your requirements and concerns before providing you with tailored advice based on your own unique personal circumstances and objectives while guiding you along the path to financial stability and a brighter future.

The information contained within this article was correct at the time of publication but is subject to change.

Consolidating debt may reduce your outgoings now, but you may end up paying more overall.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Gavin Watson

With a passion for customer service and a desire to help, Gavin lives and breathes mortgages and protection. Having passed his mortgage exams in 2006, Gavin has helped thousands of clients just like you! With such vast experience, there’s no doubt that he is a first-class mortgage adviser. Away from work, Gavin loves creating memories with his family and friends.