Many people in the UK are struggling to manage their debts and if this is something that you can relate to, you will understandably want to improve your situation before your financial predicament gets any worse.
Debt consolidation is one way to reduce the amount of money you have to pay out each month. You can consolidate your debt with an unsecured loan, a personal secured loan, or a remortgage.
In this article, we will talk about remortgaging for debt consolidation, how it works, and the pros and cons of this type of secured loan. Keep reading to learn more and if you have any questions after reading our guide, with a mortgage advisor at YesCanDo Money for FEE-FREE mortgage advice and support.
How can I pay my debts by remortgaging?
As long as you have equity in your property and you meet your chosen lender’s eligibility criteria, you may be able to remortgage onto a new mortgage deal. You would then have one loan to manage rather than several and provided the interest rate is lower than that on your other loans, you should be financially better off in the short term.
Paying off a secured loan when you remortgage?
If you have a secured loan you will have no choice but to pay the secured loan off when you remortgage. When you took out the secured loan a second charge would have been put against the property and it will be a condition that this is repaid along with your mortgage. We are very experienced with the scenario and have come across many clients that have a secured loan and have paid this off when remortgaging.
How does a remortgage work?
In simple terms, a remortgage is when you switch from one mortgage deal to another. Many people remortgage when they approach the end of their mortgage term. Instead of falling onto their lender’s standard variable rate, which is often higher than the rate of interest they were originally on, they can switch to a new deal at a lower rate of interest.
There are other reasons for remortgaging beyond moving to a better deal, however. Some people remortgage to raise money for home improvements and, as we are discussing in this article, some people remortgage for debt consolidation.
When remortgaging for debt consolidation, you need to take out a new mortgage that incorporates the value of your existing mortgage plus the value of the equity you want to release to pay off your debts. This is a great idea in theory, but as there are costs and risks involved, it’s our observation that you shouldn’t remortgage until you have received financial advice from a financial advisor or a specialist mortgage broker, such as ourselves.
Can you remortgage to pay off debt?
If you are eligible for a further advance from your lender or if you can find a more affordable mortgage deal elsewhere, you may be able to remortgage to pay your debts. You can do this by raising a lump sum from your equity and paying off your debts or by consolidating your existing loans into your new mortgage.
Is it a good idea to pay to remortgage to pay off debt?
The answer to if it is a good idea or whether or not you will be able to remortgage will depend on a few factors. Below we break down the things to think about to decide whether remortgaging to manage debt consolidation is a good idea.
Do you have enough equity to remortgage?
Equity is the portion of your home that you own. In other words, it is the amount that you have already paid off on your mortgage, including the initial mortgage deposit.
So, if your property is valued at £300,000 and you have £100,000 left to pay on your mortgage, your equity (the amount you own) would be £200,000.
The equity in your home doesn’t only increase when you make your monthly payments. It can also increase if the value of your property goes up, be that because of a rise in house prices in your local area or because you have made home improvements that have raised the value of your home.
To check to see if your home has sufficient equity, you can get an estimated value from an estate agent and then subtract the remainder of your mortgage to find out how much equity you own. If this is enough to cover a remortgage, you will be able to ask your current lender for a further advance or apply for a mortgage elsewhere.
Is additional borrowing allowed with your current mortgage deal?
If your home’s value allows you to release equity but your existing mortgage deal doesn’t allow for additional borrowing, you will have to remortgage with a new lender.
If your mortgage does allow for further borrowing, check for any fees that may be involved as switching lenders might still be the better option for you.
Does your mortgage term enable you to remortgage now?
It’s usually better to wait until you are near the end of your mortgage term before you decide to remortgage. This is because you will avoid your lender’s early repayment charges if you wait until your deal has almost expired.
If you don’t want to wait until your mortgage term is almost over, you could be allowed to remortgage early. However, most lender’s set an initial period where you are locked into your mortgage (usually six months) so you may not be allowed to remortgage before then.
What is debt consolidation?
Instead of making multiple debt payments each month, you can consolidate your debts into one monthly payment. So, rather than have multiple payments and lenders to worry about, you only have one lender to answer to and one debt to pay.
This can make life easier for you as you should be able to budget better and stay in control of your cash flow. As we have discussed, remortgaging is one way to consolidate debts but you do have other debt consolidation options, such as taking out another type of secured loan from a trusted lender.
Should I consolidate my debts?
A debt consolidation mortgage is an excellent idea if you are struggling to pay off your outstanding debts. You will save yourself a lot of worry and stress if you only have one monthly payment to consider as you won’t have multiple lenders asking you for money.
However, when you take out a new loan for consolidation, be that a mortgage or another form of loan, you may be subjected to a longer loan term. As such, you will be paying interest for longer so consolidating debt might not be worth it if you are close to the end of your other loan terms.
Seek advice before coming to a decision. Get in touch with a mortgage advisor at YesCanDo. One of our experienced mortgage advisors will carry out an affordability assessment and check you have enough equity. An alternative is to speak to a debt charity for further advice on managing and paying off your debts.
Can I remortgage to consolidate debt?
If you currently have a mortgage and you are nearing (or past) the end of your introductory rate period, you may be able to remortgage. The maximum loan amount you will be eligible for will depend on your affordability, the value of your property, and the loan-to-value of your home.
What Types of Debt Can You Consolidate with a Remortgage?
With a remortgage, you can consolidate the following types of unsecured debt.
- Personal loans
- Credit card debt
- Store cards
- Car finance
- Money borrowed from family members or friends (if you pay interest and there is an agreement in place)
What Types of Debt Can’t You Consolidate with a Remortgage?
You can consolidate most forms of debt with a remortgage but if you have a form of unsecured borrowing with 0% interest, it makes no sense to consolidate these onto a mortgage where you would have to pay interest.
Should I remortgage to pay debt?
If you’re struggling to make the monthly payments on your credit cards or other debts then remortgaging could be the right answer for you. There are benefits to doing so but as there are also risks, you should seek advice from a debt professional or mortgage advisor before you go through with the remortgaging process.
Benefits of remortgaging to pay off debt
Your life can become less stressful
With only a mortgage to pay, you will no longer have to worry about your credit card debt and other loan payments. You won’t have to worry about letters coming through your door from your existing loan providers demanding payments from you. And you will be less likely to get into a financial muddle when budgeting your finances.
You can get back on track financially
If you are overwhelmed by your existing debts, it might be that you can’t see an end to your loan payments. Budgeting and saving money will likely be difficult and you might have a bad credit rating if you have fallen into arrears.
But if you consolidate with a remortgage deal, your only loan expense will be your mortgage repayments and as these will have an end date, you won’t feel as if you will be paying off your debt forever. With fewer outgoings, you should also be in a better position to budget and save. And if you keep up with the repayments on your mortgage borrowing, your credit rating should start to improve.
Your monthly payments will be lower
Remortgaging allows you to move on to a better mortgage deal with lower interest rates. As such, your mortgage should be cheaper than your current mortgage deal. And when taking this form of additional borrowing to consolidate debts, you will also benefit financially as your monthly payments should be lower than your current monthly debt repayments as you will be paying off your mortgage over a longer period of time. Check the example below.
Debt consolidation Remortgage Example
If you have a loan of £12,000 that is repayable over 2 years at an interest rate of 10%, you will be paying around £550 a month.
If you were to pay back that loan through a remortgage, your payments will be smaller. If you took out a 15-year mortgage, for example, at an interest rate of 5%, your payments would be around £70 a month. If the interest rate remained at 10%, your payments would still be smaller as you would be paying around £75 a month.
This is an example of how you can save money with a debt consolidation mortgage. However, you have to be careful and make sure it makes financial sense to you as consolidating debt with a remortgage could cost you more over a longer term.
The risks of remortgaging to pay debt
You will be paying more in the long term
As we mentioned, you will be making payments over a longer period. These will be smaller than your existing loan payments but as your mortgage term will be longer, you will end up paying more in the long term due to the additional interest repayable on your loan.
Your home will be at risk if you fall into arrears
Your assets aren’t at risk if you fall into arrears with any unsecured loans you hold. But when you consolidate your unsecured debts into a remortgage, you will then have a loan that is secured against your home. The same applies if you take out a personal loan secured against your property.
The risk with secured borrowing is that your home may be repossessed if you fall into arrears. Therefore, you should only consider secured debt if you are sure you will be able to make each mortgage repayment over your loan term.
You might have to face early repayment charges
If you decide to remortgage during the introductory period on your fixed-rate mortgage, you might have to pay the early repayment charge set by your current mortgage lender. As such, you might want to wait until this period has passed before you remortgage for debt consolidation.
Alternatives to remortgaging
Clearing debt via a debt consolidation mortgage can be a good idea but there are alternatives.
If you don’t want to remortgage or if it’s not possible due to the terms set by your existing lender, then you could use a secured personal loan to consolidate your debts. Secured loans often come with higher rates of interest so you may have to pay more than you would on a mortgage. However, secured loans can be repaid over a long period of time so you can still benefit from smaller repayments due to the longer duration of the loan.
Unsecured loans are another option. But if you consolidate your debts with one of these loans, your monthly payments will be higher. This is because unsecured loans have shorter loan terms and because interest rates are high to offset the risk to lenders.
A further advance on your mortgage
A further advance is definitely an option to consider. It can be a very cost-effective way to consolidate debt. It is where you borrow more money on your current mortgage with your existing mortgage lender. It is our mortgage advisor’s experience that whether it makes financial sense to choose this option fully depends on how far you are into your mortgage term and which lender you are with.
Conclusion: Should I remortgage?
Debt consolidation mortgages can be a good idea but you need to remember that your home could be at risk if you fall into arrears.
Before coming to a decision, think about what debts you want to consolidate and look at the loan terms on them. If you are coming to the end of your loan or you only have a few hundred pounds left to pay, you might want to continue paying these instead of considering debt consolidation mortgages. This is because a new mortgage will have a much longer loan term so, despite the smaller repayments, you will be spending more in the long term.
We recommend speaking to your mortgage provider as you need to find out the loan to value of your mortgage and the terms of your current agreement. The loan to value will determine whether or not you are in a position to remortgage. If you are allowed to remortgage, you should still think carefully before borrowing money from mortgage lenders. Yes, you will reduce your monthly repayments but you remortgage at your own risk due to the issues we have mentioned.
Seek more advice before coming to a decision. Get in touch with a local debt charity for a discussion of all of your options and speak to our team of mortgage brokers about the pros and cons of remortgaging to pay off debt.
Remortgage to consolidate debt with the help from YesCanDo
If you’re tired of loan and credit card bills coming through your door, a remortgage could be one way to pay off debts you owe.
Get in touch with an experienced mortgage adviser at YesCanDo and they will discuss your options with you. If remortgaging is the right answer, your appointed adviser will advise and explore the mortgage market for deals with the lowest mortgage rates using a mortgage affordability calculator and will recommend the most suitable mortgage to you.
If remortgaging could be costly for you, perhaps because your bad credit rating rules you out of the best mortgage rates when you borrow money, your adviser will explore alternative options with you.
We are a family-run mortgage broker and have mortgage advisers waiting to hear from you so if you would like to discuss remortgaging in more detail, fill out the form below or get in touch with us using the other contact details on our website.