Remortgaging to consolidate debt – Is it really a good idea?
Most people associate remortagaging with securing a better interest rate for their monthly repayments or releasing funds for home improvements, but it is also possible to remortgage to consolidate debt. This will release cash from the equity in your property and if like many homeowners, yours has gone up significantly in value in recent years, this may seem like easy money. But the reality is that you are then taking on a bigger loan, so will remortgaging to consolidate debt really put you back in the black?
Can I remortgage to consolidate my debt?
If you are a homeowner and have lots of credit card bills or a loan that you need to repay, you could consider using the equity in your property and remortgaging to pay off debt. This is particularly tempting given the record low mortgage rates currently on the market and the seemingly ever-rising house prices, meaning many homeowners have plenty of equity in their property but may still be struggling with what’s in their wallet.
There are barriers to attempting to remortgage with debt and it won’t be an easy process. Lenders will take into account the value of your property, but of equal, and possibly more importance, is your credit rating. Lenders will use your credit file to give an indication of how well you can repay debt and if you are already struggling to repay credit card bills or have missed payments on other loans, this may work against you in a remortgage application as it could push down your credit score. If your credit rating is too poor, this could affect the amount you can borrow against your property or the rate that you will be charged.
Things to consider before remortgaging to consolidate debts
The equity in your property may seem like an easy route to getting your hands on some cash in order to reduce your debts, but it isn’t always the best idea. When remortgaging, a lender will look at your existing product and the value of your home and based on your application and credit file will decide how much it thinks you can afford to repay each month and what it can lend. If you are releasing cash to pay off debts you will need to borrow more than your outstanding mortgage. As your loan will be bigger, so will your repayments. This means you may well be able to pay off your debts, but you are then left with higher remortgage payments.
It is important to consider the rate on offer and how long the new mortgage will be for as well as the type of product. There may also be legal and valuation fees to pay with your remortgage. With all this in mind, you need to work out if it is worth paying for a larger loan in return for paying off debts. Will this actually improve your financial situation?
Managing debt can be tough but you are not alone. Organisations such as Stepchange or the Citizens Advice Bureau can provide debt advice and help you make a plan to get you out of the red. They can help weigh up your options in this sort of situation and provide tips so you don’t end up overspending once your debts are paid off.
When might remortgaging to pay off debts be a good idea?
Mortgage rates have fallen to record lows in recent years. They are beginning to creep back up as cheap bank funding becomes less available but if you can get a low enough rate a remortgage may work out better for you than a loan to release money to pay off debts. If you can find a record low mortgage, the monthly repayments can be less than a personal loan.
The average rate on a remortgage with a 40% deposit in March 2018 was 1.53%, according to the Bank of England. In comparison, there has been a price war in the personal loans market, with annual percentage rates (APR) as low as 3% and under in some cases. You can typically borrow more with a remortgage than a personal loan. A personal loan provider may only lend up to a maximum of £50,000 while a remortgage would usually start from this amount. A remortgage would also let you spread repayments over a longer term compared with a loan. The monthly repayments on a mortgage would usually be worked out over 25 or 30 years, while loans, although for a smaller amount, are calculated over one, three or five years.
When remortgaging to pay off debts is rarely a good idea
Getting a lower rate spread over a longer period to release cash to pay off your debts may sound attractive. But there are downsides as you will be adding debt to your mortgage. You are increasing the overall size of your secured debt and the repayments will be higher overall compared with a personal loan or other form of debt as you tend to pay interest over a longer period, so you need to be sure you can afford the extra repayments. There may also be product, legal and valuation fees to pay. Currently, if you have credit cards built up or a loan to repay, they are most likely unsecured. If you fail to repay it will affect your credit rating and you could end up with county court fines and in extreme cases, imprisonment. This is pretty bad but taking out a remortgage to release funds to pay them off essentially turns them into a secured product, which then brings your property into the equation. If you cannot keep up with the repayments on your mortgage your lender could repossess your property and you will lose your home. Is it worth putting your home at risk to pay off debts?
Cheaper alternatives to remortgaging
A remortgage isn’t the only option to consolidate debt. Before taking out any financial product you should review your own income and expenditure to see if you can budget better. Prioritise paying off the ‘priority debts’ first, which aren’t always the biggest but are the most important with bigger consequences of missed payments such as electricity, mortgages and rent. Organisations such as StepChange can help set a debt repayment plan and also provide guidance on whether it's better to remortgage or get a loan if that seems like a viable route.
There are options beyond a remortgage. Personal loan rates have fallen to around 3% and the application process is less intense than a remortgage as it is based on your credit rating rather than on strict affordability criteria. Bear in mind that legally only 51% have to get the advertised rate though so you could end up paying more than you expect. Alternatively, a balance transfer credit card would let you pay off an old card and move the balance to a new provider and many will have interest-free introductory offers often for up to three years. Balance transfer cards usually have a transfer limit of £3,000 or £5,000 and will let you focus on just repaying the debt rather than interest for a set period. There are downsides to balance transfers though as there will be penalties for missed payments and the card will move to a high APR at the end of the term, usually around 18.9% or more.
There are also peer-to-peer platforms that will let you use assets other than property such as jewellery as security for a personal loan. A platform will decide how much can be released based on the value of the item and lenders will then fund the loan. It does mean putting what could be treasured items at risk, but this may be preferable to adding to your mortgage.
Where to get help if remortgaging is right for you
There are plenty of comparison websites that will show the best rates for remortgaging if you choose this route. But if you are in debt it is likely you will need help setting a strategy and working out how much and the best way to borrow. This is where a mortgage adviser would come in. An adviser could recommend the best remortgage deals for debt consolidation and will help make your application. They will also know the best lenders when it comes to borrowers with debts and poor credit rating. If you don’t have a mortgage adviser then request a free mortgage review in 30 seconds from an FCA regulated mortgage adviser.