How Should You Remortgage To Consolidate Debt?

You may have thought about settling debt with a mortgage. If you already have a mortgage, you can remortgage to consolidate debt. This lets you repay your dues with a larger sum taken on a loan against your property, but is it a good idea or a bad idea?

However, doing so is not as simple and convenient as it sounds. It involves moving your unsecured debt into a secured loan against your home. Not repaying this bigger debt (of the mortgage) can make you lose your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayments. Explore Fee Free Mortgage Broker Marianna FS.

You need to understand the procedure and implications that allow you to remortgage to consolidate debt. This guide will clear up the basics and help you understand whether you should make the decision to consolidate your debt by remortgaging your property.

What is a debt consolidation remortgage?

Debt consolidation remortgage refers to remortgaging your property to raise extra money from your property equity to settle your debts. This can be done by ending your current mortgage deal or at the time of end of a fixed-term mortgage.

Homebuyers often remortgage to consolidate debt to pay off credit card bills, car finance, personal loans, and other high-interest debts. This helps to bring all the payments into one manageable monthly payment.

If you are planning to do this, you should know that it requires more specific advice standards than a simple remortgage deal.

Make the move only if it is in your best interest. Even your mortgage lenders and brokers will give transparent and suitable advice to their clients before they remortgage to consolidate debt.

However, if this arrangement suits you, it can reduce your overall debt in the long run.

Here is a quick example of scenario comparison before and after remortgaging to consolidate debt:

How does remortgaging to consolidate debt work?

A homeowner typically goes through these stages for a debt consolidation remortgage (at the time of the current deal ending):

• Debt Auditing: Gather and analyse your total debt, along with your monthly mortgage repayments.
• Equity Assessment: Check your equity in your property and compare it with your current mortgage balance.
• LTV Check: Check if your new mortgage deal stays within the LTV limits.
• Affordability Check: The lender will assess your affordability with a focus on your income and spending.
• Completion: Once satisfied, the lender will approve the remortgage and once legal is done, then funds are released.

Some lenders may insist on paying off your creditors themselves using the new mortgage. This gives them the assurance that your debts are paid and your intentions were always clear.

How much debt can you consolidate with a remortgage?

Your LTV (loan-to-value) ratio determines how much you can borrow with a remortgage. You can get a standard mortgage at an LTV as high as 90%. This means that you can borrow up to 90% of the property's market value.

However, most lenders reduce the LTV when homebuyers remortgage for debt consolidation.

Here are the LTV caps by the most popular mainstream lenders from the high street.

The main reason behind these limits is the lenders' insecurity. When you remortgage to consolidate debt, your mortgage lender's risk increases. They need this "equity buffer" to stay safe in case property prices fluctuate.

What are the benefits of remortgaging for debt consolidation

Here is why many homeowners remortgage to consolidate their debts:

Saving on interests

At least in the short run, moving from high-interest debts (like credit cards) to a relatively lower mortgage interest rate helps you save more.

Simplified Budget

Managing multiple debt instruments can get messy for most homebuyers. Consolidating all of them into a single debt makes such management simpler.

Immediate Cash Flow

When you remortgage to consolidate debt, you spread your existing debt over a long time. This reduces your immediate debt burden and increases your cash flow.

Recovering Credit Score

If you have been regular in your debt settlements, clearing off all your existing debts with a remortgage can have a positive impact on your credit score.

Disadvantages of remortgaging for debt consolidation

Most homeowners ignore that while their monthly payments drop. But here are the key things you need to think about before opting to remortgage for debt consolidation.

Risking your home:

Securing unsecured debts against your home can risk your home if you do not repay the mortgage on time. It is very important to have an action plan of how you'll keep paying the mortgage till it is completed. Having contingencies in case your circumstances change as a result of job loss or being unable to work due to sickness.

It is expensive:

Transferring your short-term debt to the long term can be expensive. The total amount you end up paying back could be a lot more. Unsecured debts' interest rates are higher, but for the shorter term, whereas mortgage interest rates are typically lower than interest rates but for the longer term. That means in the long-term you could end up paying more if you remortgage with the goal of paying off debts.

Know the debt cycle trap

Many homebuyers get so enamoured by the relief of debt consolidation that they get stuck in a debt cycle trap. When they consolidate their debt, they end up building up new credit in no time. This nullifies the benefits of debt consolidation, only putting additional pressure on the homeowner.

Debt consolidation remortgage vs. other options

Debt consolidation remortgage is a great option to manage your debts and improve your short-term cash flow. However, it is a big commitment. It is always better to keep your options open. Like taking advantage of a balance transfer. Having an unsecured personal loan can be a good option for the short term rather than securing the debt against your home.

Taking the financial discipline test

Be honest with yourself before you remortgage to consolidate debt. Ask these four questions to yourself in the form of an honest financial discipline test:

• Why did your debt(s) occur? (Is it a recurring financial problem or a lifestyle issue?)
• Have you tracked your spending for the last 3 months?
• Will you close your credit accounts after debt settlement?
• Do you have an emergency fund to ensure you won't go back to the debt?

How debt consolidation impacts your credit score

Here is a month-wise impact on your credit score if you remortgage to consolidate debt:

• Month 1: Your credit score is likely to dip due to the hard search from your remortgage application.
• Month 3: This is when your score slowly starts increasing after your credit utilisation becomes 0%.
• Month 6: By this time, your new mortgage history has started building. Your credit score stabilises.
• Month 12: You are likely to have a better credit profile by now (only if you haven't taken up new debts).

Be mindful before making the decision to remortgage to consolidate your debt. Seek professional help throughout your journey for the best results.