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The Comprehensive Guide to Remortgaging for Debt Consolidation: Weighing the Risks and Rewards

Table of Contents

Introduction: The Debate Surrounding Remortgaging for Debt Consolidation

Debt consolidation through remortgaging is a topic that elicits varied opinions, especially among financial brokers. The crux of the matter is whether this strategy is a viable method for managing debt or if it’s a decision fraught with risks. In this article, we aim to provide a balanced, informative guide to help you make an informed decision.

What is Remortgaging for Debt Consolidation?

Remortgaging for the purpose of debt consolidation entails refinancing your existing mortgage to a new, often larger one. This allows you to combine your existing debts—be it from credit cards, loans, or other sources—into the mortgage. This method may provide a way to manage monthly payments better and possibly secure a lower interest rate.

How Does it Work?

  1. Consider the Property Value: The first step involves assessing the current value of your property, using tools like Rightmove and watching sold prices in the area can give you a good indication of the current value, however the only way to know for certain is when the lender instructs their own surveyor. Fortunately most residential remortgages have free valuations and sometimes these can be done electronically giving you a very fast decision.
  2. Checking Mortgage Balance: Familiarize yourself with your current mortgage balance, either by logging into your online banking or using financial tools like Checkmyfile [insert link] reports to view all your credit reports in one place.
  3. Equity Evaluation: The difference between the current mortgage balance and property value is your equity. This is crucial because often lenders will restrict this where debts are being consolidated to a greater degree than a standard purchase or remortgage.
  4. Consider Affordability: We will review income and outgoings to establish the maximum you would be able to borrow based on this and recommend the lender based on this as well as their available rates and terms
  5. New Mortgage Application: A new mortgage is taken out that covers not just the original mortgage amount, but also your existing debts.
  6. Debt Payoff: The new loan is used to pay off your existing mortgage and other debts. Its possible that the lender may require the solicitor to ensure these are paid off on completion.

Pros and Cons:

Advantages

  • Simplified Financial Management: Combining various debts into one loan simplifies your financial landscape.
  • Reduced Monthly Payments: Often, remortgaging leads to lower monthly payments compared to summing up different debt payments.
  • Lower Interest Rates: Mortgages usually offer lower interest rates compared to credit cards or personal loans.

Risks

  • Long-Term Cost: The elongation of your debt timeline may result in higher interest costs over time, often quite dramatically. Its important to weight this up and your broker will highlight this as part of your discussion.
  • Asset at Stake: Defaulting on payments can risk property repossession, the debts will no longer be “un-secured”!
  • Debt Spiral: Without prudent financial behaviour post-consolidation, you risk accumulating more debt, thereby negating the benefits.

How can you know if its right for you?

Debt is not just a financial problem; it’s an emotional burden. The stress, guilt, and worry it causes cannot be overstated. While financial metrics might suggest against remortgaging for debt consolidation, sometimes the emotional relief it offers makes it a compelling option. Armed with the facts you’ll be better placed to weight that decision up

At AALTO mortgages, we can provide invaluable advice, using calculators and financial models to demonstrate the long-term implications of debt consolidation. By working out the total cost of your debt on its current, short term unsecured basis, and then comparing this to the extra total cost of credit over the lifetime of your mortgage, over and above the current balance, you will be able to see the real cost of this approach. It might be surprisingly large because of the compounding effect over a 25 year term. However, if your current monthly payments are causing significant stress, or you are struggling to meet your obligations, that has to be weighed against the cost of any resulting poor credit score on future mortgages.

It doesn’t have to be all or nothing. It may be prudent to consolidate just some unsecured debts, whilst finding a way to fast track repayment on the rest. Either way brokers at AALTO Mortgages will be able to guide you through the numbers in plain language and with no obligation.

Final Thoughts: To Remortgage or Not?

Whether remortgaging for debt consolidation is suitable for you depends on your unique circumstances. We recommend a thorough evaluation of your financial standing, consultation with experienced mortgage advisors, and introspection on your financial behaviour before making this significant decision. Speak to us at AALTO Mortgages and we will provide the facts in a simple to understand manner, lay out the feasible options and recommend the right mortgage for you, before handing all the processing and chasing required. Call us now and see if we can reduce your monthly outgoings.

 

Frequently Asked Questions

What is remortgaging for debt consolidation?

Remortgaging for debt consolidation involves replacing your existing mortgage with a new one and using the extra funds to pay off other debts like credit cards or personal loans. The process combines multiple debts into a single monthly repayment, simplifying your finances and potentially reducing your monthly outgoings.

How does debt consolidation through remortgaging work?

During the remortgage process, an advisor will help you list your existing debts and mortgage balance. They will assess your income to determine how much you can afford to borrow for the new mortgage. This amount will then be used to clear existing debts, either by you or, in some cases, directly by the new lender.

What are the benefits of debt consolidation through remortgaging?

Debt consolidation can lead to lower monthly payments and provide a clearer path toward becoming debt-free. It also consolidates multiple payments into one, making budget management easier. At the end of your mortgage term, your debts will be fully paid off, provided you maintain your payments.

Can Debt Consolidation via Remortgaging Be Repeated?

Technically, yes. But it’s not recommended. Lenders do communicate among themselves, and repeated instances of debt consolidation through remortgaging could make you less attractive to future lenders.

Are there any risks associated with debt consolidation through remortgaging?

Yes, remortgaging for debt consolidation poses several risks. Most notably, you are converting unsecured debts into secured debt against your property. Failure to keep up with mortgage payments could lead to home repossession. Moreover, despite lower monthly payments, the overall interest paid over the term could be higher.

Will I qualify for a remortgage to repay debts with bad credit?

Qualifying depends on various factors including income, age, credit score, and employment status. Some lenders specialize in dealing with applicants with poor credit history, so it may still be possible to remortgage with bad credit.

How do I calculate the savings or costs of debt consolidation through remortgaging?

Calculations around savings or additional costs are complex and should ideally be done by a professional. Your mortgage advisor will assess all variables, such as current interest rates on your debts and the new mortgage, to give you a comprehensive understanding of the financial implications.

What are the interest rates for remortgaging and how do they compare to my existing debts?

Interest rates vary depending on the lender and your personal circumstances. The new interest rate may be lower than what you are currently paying on multiple debts, but keep in mind that you may be paying that interest over a longer term, which could increase the total amount paid.

Can I consolidate all types of debt, including credit cards, personal loans, and car loans?

In most cases, you can consolidate a wide range of debts, including credit cards, store cards, personal loans, and car loans. However, it’s essential to consult a mortgage advisor to determine if this is the best course of action for you. Some kinds of debts, such as payday loans might preclude you from borrowing with many lenders.

What are the fees and costs associated with remortgaging for debt consolidation?

Remortgaging involves various costs like legal fees, valuation fees, and potentially higher interest rates. Some lenders may offer free legal services or valuations as part of the package, which will be discussed in your no-obligation consultation.

 

Author: Stuart Phillips

Author: Stuart Phillips

Fully CeMap qualified, Directly Authorised by the FCA and with over a decade of experience, Stuart has a wealth of experience in both specialist BTL and residential mortgages.

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