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We’re often asked whether it’s possible and, indeed, a good idea to remortgage in order to consolidate your debts. In this article, our expert team at PIL Southampton delves into this topic. We look at what you need to consider, and how it works in practice.
Yes, you can release equity from your property through remortgaging, to give you the funds to pay off unsecured debts and manage one repayment to your mortgage lender rather than keeping on top of various debts across different lenders.
Just like with any remortgage application, the amount you would be able to remortgage would depend on your affordability criteria, how much your property is worth and how much equity you have in the property.
Consolidating your debts by remortgaging can make it simpler to manage your finances – managing one payment rather than several reduces the amount of admin you have to deal with, and can also reduce stress and worry.
Your monthly mortgage repayment after remortgaging could also be lower than the combined monthly repayments across your various loan repayments.
The interest rate from your mortgage lender is likely to be lower than through other loan providers, although this benefit needs to be weighed up against the mortgage term probably being longer than your other loan periods, which means that you will be paying interest over a longer period – resulting in higher borrowing costs over the long term.
Moving away from various debt arrangements would avoid penalties you could incur if you lose track of your repayments and get charged for late or missed payments. Doing so could also negatively impact your credit score.
Most lenders will need a sufficient period to have passed between the time you purchase your property and the time you apply to remortgage. This is to ensure that the land registry documents have been registered. For many lenders, this period is six months, though many will make an exception to this rule when the vendor has inherited the property after the death of a relative.
You can start to arrange a remortgage up to six months in advance of your introductory rate period, or whenever you like if you are already on a standard variable rate.
If you don’t already have a mortgage on your property, you can take out a mortgage solely to consolidate other debts, should you choose to do so. Depending on your affordability, you would typically be able to borrow up to 85% of the value of your property. It isn’t the norm, but a few lenders could offer you 90% or even 95%.
Remortgaging is available to cover most forms of debt: personal loans, car finance, store cards, credit cards, overdrafts, and money that you have formally borrowed from friends or family where you have a written agreement in place and you are paying interest.
It would not make financial sense to consolidate any debt you have that you are paying no interest on, like a 0% credit card deal.
The process is the same as for a standard mortgage application. Our team at PIL Southampton would look at the best options available for you in the marketplace. Once the most suitable lender has been identified, a decision in principle (DIP) can be applied for, which is a written confirmation from the lender that they will lend you a specific amount. This is dependent on the information you have provided being accurate, and you will need a valuation on the property.
Then, we’ll go through the full mortgage application with you and submit it to the lender on your behalf. If the lender’s underwriting process and valuation is successful, they will send you a mortgage offer for you to accept.
If you have missed payments on previous or existing loans, or if you have a county court judgement (CCJ) against you, it could impact on your remortgage application for debt consolidation.
Just like with any mortgage application, it will be harder to get a remortgage application approved if you have bad credit, but it’s not impossible and it will depend on your personal circumstances.
It could mean that you have to pay a higher interest rate as the lender could see you as less reliable and therefore higher risk.
It’s a good idea to find out your current credit score and do what you can to improve it – ideally several months before you apply to a lender if possible.
You need to consider the whole picture before you choose to remortgage to consolidate debt. Just to reiterate, a mortgage term is generally longer than other forms of credit, which means you could end up paying more interest in the long term, even though the interest rate on your mortgage is likely to be significantly lower than the interest rate on other forms of credit.
Remortgaging for any reason reduces the equity you have in your home. You are also securing debt against your home, unlike unsecured loans like credit card and other forms of finance deals. This could put your home at risk of repossession if you don’t keep up with your mortgage repayments.
It might not make financial sense to remortgage if your other debts are relatively small – the fees and charges you might be needed to pay in the process of remortgaging might not make the debt transfer worthwhile.
Also, it wouldn’t be prudent to consolidate your existing debts only to take out further unsecured loans in the future, which would only add to your financial demands.
It might not also be wise to move your unsecured loans to your mortgage if you would incur early repayment charges (ERCs). This could be relevant if you have a fixed rate mortgage that you are still in the introductory period of, or if you will be paying off your unsecured borrowing early, i.e. within the 90 days settlement period.
You also need to bear in mind that remortgaging will affect your loan to value ratio and, generally, the higher your loan to value ratio the higher the mortgage interest rate is likely to be.
Affordability is always an important consideration too; the more you borrow, the more vulnerable you are to potentially having your home repossessed if you can’t keep up your mortgage repayments.
If you’re still on your introductory mortgage rate and would have to pay an early repayment charge if you applied to remortgage, it could be more cost effective to take out a further advance with your existing lender. This would enable you to borrow more, whilst keeping your existing mortgage. Note: the additional amount could be on a different interest rate to your original existing mortgage amount.
A second charge with another lender could be another option – this might be useful if your existing lender can’t lend you more money. A second charge is likely to have different terms and a different interest rate to your current mortgage.
It’s important to consider the overall cost of the loan over the whole term – mortgage rates often seem attractively lower than other types of loan, but their generally longer term can mean that you pay off a lot more in the long term.
By increasing your mortgage to pay off existing debts, you are increasing your risk of potentially having your home repossessed if you can’t keep up your mortgage repayments, as the debt is secured against your home.
Remortgaging for debt consolidation affects your equity position – increasing your borrowing on the property reduces your equity share, which could affect your ability to move up the property ladder as people usually use the equity in their existing property as the deposit for their new home.
Having lower equity in your property generally means your mortgage interest rate will be higher, and it could also have an impact on your available options if you faced financial difficulty in the future.
Any debt added to your mortgage is the responsibility of all individuals named on it.
Before you remortgage, we advise you to discuss all other options available to you with an expert financial adviser. These options could include savings, 0% credit cards, personal loans and credit unions.
If you are considering remortgaging for debt consolidation, talk to our expert team of independent mortgage advisers who have lots of experience in this area. They can discuss the pros and cons with you and help you to make the right decision for you and your individual circumstances.
To make the most out of your meeting, it would be really helpful if you gathered the following information to bring to the meeting.
For any secured loans, unsecured loans, deferred purchase agreements, personal contract purchase (PCP) agreements and hire purchase agreements you may have:
For any credit cards and store cards you may have:
For any overdrafts you may have:
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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