Struggling with debt can seem like an impossible challenge, but there could be a way out.
Remortgaging to pay off debts is an option that can provide financial respite and stability.
In this guide, we will look into the details of remortgaging as a tool for debt consolidation and what you need to consider before making your decision. We will look at the pros and cons of remortgaging to pay off debts and examine how different mortgage rates may affect your budget.
Plus, we’ll share helpful tips on the process and what to look out for.
With this comprehensive guide, you should have all the information necessary to make an informed decision about whether remortgaging could be right for you.
Table of Contents
- What types of debt can you pay off?
- What types of debt can’t you pay off?
- Can a remortgage pay off a credit card debt?
- How does a remortgage work?
- What is debt consolidation?
- How to re-mortgage to consolidate debt
- Is it a good idea?
- The risks of remortgaging to repay debt
- Lending criteria
- What about any alternatives?
- FREE DEBT ADVICE
- Things to consider before consolidating debts
- Remortgage advice
- FAQ
What types of debt can you pay off?
Typically a debt consolidation remortgage would be used to pay off unsecured debts, such as:
Credit cards
Store cards
Overdrafts
Personal loans
Car finance
HP finance
These are all short-term unsecured finance arrangements that can have high interest rates.
However, you can remortgage to pay off any kind of debt. This makes the most sense when the debt you wish to repay has a higher interest rate.
Some examples of this would be:
What types of debt can’t you pay off?
It does not make financial sense to consolidate unsecured borrowing that has a 0% interest rate over to a mortgage arrangement.
A mortgage will never have a 0% interest rate and so will always be more expensive.
Credit cards that offer balance transfers will typically offer 0% interest for a certain period of time to encourage new borrowers to take out their card.
Can a remortgage pay off a credit card debt?
Yes, it is possible to use a remortgage to pay off a credit card.
Credit cards are incredibly useful and a very flexible way of borrowing money. However, it’s easy to get carried away and not keep on top of the payments.
If you only pay the minimum each month, or close to it, then your credit card debt will not reduce and each month you will be charged more interest.
A remortgage can be used to borrow enough extra money so that you can repay the credit card/s in full. This makes sense as the interest rate on your mortgage will be a fraction of that being charged by the credit card company.
Once done, you will find that your monthly outgoings are more manageable and you will likely have some extra money each month.
It’s not a good idea to do this too often. The money you borrow reduces your home equity and you will be making payments over a longer period of time.
How does a remortgage work?
The process of remortgaging involves replacing your current mortgage with one from a new lender.
The aim is to borrow the extra money needed to settle all of the unsecured debts that you owe. So the remortgage amount will be larger that the mortgage it replaces, this is known as a capital raising mortgage.
But because the interest rate is more competitive, and the repayments are spread over more years, you will be better off each month.
A remortgage will involve making a full mortgage application to a new lender. You will have the opportunity to choose a new interest rate as well as accessing your home equity.
The lender will need to approve the reason why you are remortgaging and borrowing more money.
You will need to pass the lender’s underwriting process and so having a good credit report and stable employment position will help to get the best rates. You need to have enough equity in your home to borrow the extra funds needed and stay within the lender’s loan to value limits.
What is debt consolidation?
Debt consolidation is a financial strategy that involves taking out a new loan to pay off several smaller debts. The idea is to combine multiple outstanding debts into a single, larger loan with a lower interest rate and a more manageable monthly payment. This can be a good option for people who are struggling to keep up with multiple debts and want to simplify their finances by consolidating them into a single arrangement.
If you have a couple of credit cards and a loan then you will be making three payments each month and being charged high rates of interest.
By consolidating you simplify the debts and the monthly repayments.
It is possible to consolidate cards and personal loans into a new, larger, unsecured personal loan. If the term of this loan is longer then you should still be better off.
A more significant impact will come from using your home to borrow the extra money. The money needed to repay these debts will come from a new larger remortgage and as this is repaid over a longer term the monthly payments will be quite a bit lower. Plus the interest rate will be less.
Debt consolidation can be a useful tool for helping to manage and pay off debt, but it’s important to be aware that it’s not a magic solution and it may not be the best option for everyone. By consolidating debt and repaying over a longer period it can mean that you pay more interest overall, even though the monthly repayments are lower and more manageable.
For many people this is a trade-off that they are happy to accept.
If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.
How to re-mortgage to consolidate debt
Whether you can remortgage to pay off your debts depends on a few things. Here’s what to do first:
Identify all of your unsecured debts
The first task is to total up the debts that need to be consolidated. While it may be tempting to just lump them all together, it’s better to separate those which can stay as they are from those to be repaid.
For example, a credit card with a very small balance, or a loan with just a few months left to run would both be better left as they are. Consolidation works by spreading the repayments over a longer term, but for these it would be more economical to leave them.
If you are looking to consolidate loans then ask the lender for a redemption statement, or closure statement. This will identify any extra fees you will need to budget for.
Check your loan to value LTV
All mortgage lenders work to a maximum loan to value percentage. This percentage represents the level of debt compared to the value of your home.
As an example: A mortgage of £250,000 secured on a property worth £400,000 would have an LTV of 62.5%.
A debt consolidation remortgage LTV will be your current mortgage, plus the debts to be repaid, shown as a percentage of the property value. You really want this figure to be below 90%.
Our online loan to value calculator can help with the sums.
Check your credit report
Your credit score may have been negatively impacted by your debt situation. To see the current status you can get a copy of your credit report. This will help you to identify any problem areas and will also be useful to your mortgage broker.
Contact a remortgage specialist
Applying for a remortgage in itself is quite straightforward. But by using a remortgage mortgage broker, they can provide advice on the best way of structuring the debt consolidation and then identify the lenders that you qualify for.
They will be able to compare the various deals and pick out the one that best suits you, even if you have some bad credit. Your broker should also be able to give you an idea on the types of documents needed when you remortgage.
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
Is it a good idea?
If you have a lot of unsecured debt and are finding it difficult to maintain the payments then debt consolidation could be a good solution.
A debt consolidation re-mortgage will help by:
- Moving the debts over to a lower interest rate
- Spreading the repayments over a longer term
- Reducing your debt-to-income ratio
It’s important to remember that you are not paying off the amounts you owe, you are moving the debt to a mortgage which is secured against your home.
The process of debt consolidation should not be repeated too often. This would indicate that you are spending quite a bit more than is affordable.
Why do debt consolidation mortgages cost more in interest?
Using your mortgage to consolidate other debts such as personal loans and credit cards can often be a lifesaver. For many people the new monthly payment is less than they were paying to all of the different lenders. So why do all the lenders and brokers have a warning that debt consolidation mortgages will cost you more money?
The risks of remortgaging to repay debt
The opportunity to consolidate debts and reduce your monthly payments can be a hard one to turn down . For many people struggling with debts this is an important lifeline that stops them spiralling into more unmanageable debt.
Before jumping in it is important to understand any downsides or consequences.
Being in debt and struggling to make the payments each month is extremely stressful but we would recommend discussing your options with a mortgage broker before you make any firm decisions.
There are often choices and options available that you may not be aware of.
Here are just some of the factors to consider before remortgaging:
It could cost more
By consolidating debt into your mortgage you will be repaying it over a longer period of time. This could mean that you pay more in interest as it has taken additional years to pay off.
There may be fees
Your current mortgage lender may charge you exit penalties, or early repayment charges. While new remortgages often come with a ‘fees free’ offer, there’s always some costs that are not covered.
Your home is at risk
You are moving your unsecured debts (cards/loans etc) over to your mortgage. As your mortgage is linked to your home this does increase the risk.
Lending criteria
To qualify for a debt consolidation remortgage you need to be aware of the lenders rules and what they are looking for.
A mortgage broker will be able to do this for you, and will only suggest lenders where you meet the necessary criteria.
The amount of equity that you have available plays a big part in how much you can borrow. Even if your earnings could support a much larger mortgage, the lender will only go up to a certain percentage of the property value. This is known as a loan to value, or LTV. We have a simple online loan to value calculator that can do the sums for you.
The maximum LTV for a debt consolidation mortgage is around 90%.
So you can potentially borrow upto 90% of your property’s value, including the mortgage you have now.
Obviously the lender will need to check that you can afford the new repayments and that your credit status is good enough.
Issues with your credit history, particularly any bad credit, will play havoc with your ability to get a new mortgage. There are lenders offering mortgages for people with bad credit but it’s best to get some advice from a mortgage broker first, as they are more expensive.
What about any alternatives?
Before applying for a debt consolidation remortgage it’s worth investigating other alternatives. Your choices may be limited by the extra amount you need to borrow and your own affordability position.
Balance transfer
If the debts are relating to a credit card then maybe transferring the balance to a new card might help.
Often these will be offered at a lower interest rate, which may then free up some money for extra debt repayments.
Personal loan
Personal loans are unsecured borrowing and available up to £25,000. The good thing is that they have fixed monthly repayments over a set term.
If you need more than 25K then a mortgage is probably the better option. Also the monthly costs of a personal loan can be high.
Secured loan
A secured loan or a second charge mortgage is an option when you don’t want to get rid of the mortgage you already have. Perhaps you have a really low interest rate, or due to a change in circumstances you would no longer qualify for this mortgage again.
You are applying for a second mortgage for the debt consolidation part, and your existing mortgage remains unchanged.
Use another property
If you own other properties then it’s possible for these to be used as security to raise the money you need.
You still need enough equity to do this but your mortgage broker will be able to show you the available options.
Free debt advice
Debt can be an overwhelming burden, and it’s easy to feel like you’re stuck in a never-ending cycle of payments.
If you’re living in the UK and struggling with debt, there is help available from a number of debt charities. These organisations provide free advice and guidance on how to manage your finances better and get out of debt sooner.
These include:
Each charity offers different levels of support including debt counselling, debt consolidation, budgeting advice, and even negotiation with creditors on your behalf.
Things to consider before consolidating debts
There’s no doubt that consolidating unsecured debts in to a remortgage can dramatically reduce your outgoings. But it is important to remember that these debts have not gone away, they have simply been moved over to your mortgage, which is now bigger than it was.
Before you decide to consolidate your debts, it’s important to consider the pros and cons. Debt consolidation can be a useful tool for managing your debt, as it could make your repayments more manageable and lower the overall interest rate on your debt.
However, there may be additional costs associated with consolidating, such as setup fees and early repayment charges. It’s important to think about how you will afford these costs in addition to making regular repayments. Additionally, consolidating your debt may extend the length of time you have to pay back the money borrowed, meaning you could end up paying more in total than before.
Remortgage advice
When it comes to remortgaging for debt consolidation, it is important to get advice from a qualified and experienced broker.
A qualified mortgage broker can help you understand the different options available and provide tailored advice based on your individual circumstances. They will assess the amount of equity you have in your property, consider your current financial situation and review any existing credit commitments.
Furthermore, a mortgage broker can provide suggestions on how to manage your finances in the future, helping you stay out of debt. They may even be able to provide information on debt advice services that can help you make a plan for paying off your debts and get back on track with your finances.
By getting impartial advice from a qualified mortgage broker you will have greater peace of mind that you are making the right decisions for your financial future. Taking the time to research different remortgage options and seek professional advice can be invaluable, so it pays to do your homework before taking out a mortgage.
If you need more information or want help with remortgaging, speak to an experienced broker today.
FREQUENTLY ASKED QUESTIONS
How long does it take to remortgage?
The whole process would usually take 4-6 weeks.
How long do I have to own a property before I can remortgage?
You are allowed to remortgage a property at any point. However, you may find that your choices are limited if you want to do this within the first six months. For more info read: What is the 6 month mortgage rule?
Can you use equity to pay off debt?
Yes, this is how the remortgage option works. You borrow the extra money against the equity which enables you to pay off the other debts.
Can you borrow 100% of your homes value?
No, it is not possible to borrow 100%. Mortgage lenders for debt consolidation would generally go up to 90% LTV.
Can you remortgage with bad credit?
This depends on the extent of the bad credit. Providing that you have a good amount of equity you can normally find remortgage options, even with some bad credit.
Do you need a solicitor to remortgage?
A solicitor or conveyancer will be required to make the various checks and amendments with Land Registry. However, with a remortgage you can normally use the lenders solicitor, which will either be free or at a reduced rate.
Can you use a product transfer to pay off debt?
A product transfer is used to change interest rate product but without changing lender. It is not possible to borrow any more money. This is one of the major differences between a product transfer and a remortgage.
