If you’re a home owner, your house is likely the most valuable possession you have to your name, but combine it with a remortgage and it can also be a lifeline if you’re struggling with debt.
Remortgage in order to consolidate debts? Why?
The most common reason for remortgaging is to gain additional funds with which to invest in home improvements. You may want to add an extension, convert the garage or fix that leaky roof, but if you’re saddled with a lot of debt, you may have overlooked another benefit of remortgaging.
If you have several debts which you are struggling to repay each month, you may wish to consider consolidating them into one, manageable monthly payment. There are several ways to do this but an increasingly common option is to secure a refinance of the outstanding debt against a property. To do this, you need to remortgage.
Because loans secured against property are generally the cheapest way to borrow, debt consolidation remortgages are a great way to reduce your monthly debt payments and spread them over a longer period of time.
Do I qualify for a debt consolidation remortgage?
The process you’ll need to go through to apply for a debt consolidation remortgage is nearly identical to that of any remortgage, but you’ll need to find a lender who is willing to loan you money for the purpose of repaying debts at the loan-to-value (LTV) ratio you require.
Firstly, you’ll need to prove that you can repay the loan by passing a credit assessment. A nice, clean credit history is therefore essential. Due to the lengthy repayment term most secured loans are saddled with, whilst your total regular outgoings will reduce overall – you will pay more interest.
How much could I borrow?
A debt consolidation remortgage will only be an option if you have some equity in your property. In the UK, the maximum LTV usually hovers around 90%. So, if your property is worth £100,000, the maximum you could borrow would be £90,000. When it comes to debt consolidation remortgages, it is important to factor in your existing mortgage, therefore in our example, if that stands at £80,000, the most you could consolidate would be £10,000.
Advantages of consolidating debt by remortgaging
- Budgeting will be easier. By consolidating all of your existing debt into one monthly payment, making sense of your income and expenditure will be far simpler. You’ll also know exactly what your debt will cost you each month, so planning ahead and forecasting will be easier.
- Interest rates will be more favourable. By remortgaging to pay off debts, you’ll benefit from a better rate compared to standard loans and credit cards.
- Poor credit rating? If your credit history is preventing you from settling your debts via other means, some lenders will be more lenient when you take out a second secured loan against your home. Similarly, if you’re self employed, ‘self-cert’ might be an option, which essentially enables you to declare your own income without the same degree of proof required.
Disadvantages of consolidating debt by remortgaging
- You’ll increase the long-term cost. While consolidating all of your debts by adding them onto your existing mortgage might be tempting, it is important to remember that you are simply stretching out the time by which you must pay them all back and, subsequently, paying more for the privilege.
- Your home is at risk. If you fall into arrears with your mortgage, you run the risk of losing your home – perhaps the biggest risk you could ever face when falling behind on loan repayments.
- It can turn into a habit. The general consensus is that you should only ever remortgage to pay off additional debts once. The temptation to continually do so could result in increased borrowing and severe damage to your credit history.