Should I remortgage to consolidate debt?
This is a question you may be asking yourself and which we will attempt to answer within this article. First of all, let’s look at debt consolidationConsolidating multiple debts into one loan, often using the ... and what it is …
For most people, debt and any number of lines of credit are perfectly normal, everyday features of our financial affairs. Those debts might include secured loans, personal loans, credit card debt, your current mortgage, and any amount of additional borrowingAdditional funds borrowed against an existing mortgage..
As a result, the budgetary calendar is likely filled with a host of dates on which various debt and credit repayments fall due, a range of different interest rates on the outstanding debts, and the ever-present worry that a missed or late payment may have an adverse effect on our credit history.
Is there any simple and straightforward way of streamlining this state of affairs to make your debt management easier – and, potentially, cheaper into the bargain?
What is debt consolidation?
The answer to that question might lie in something called debt consolidation.
Just as the term suggests, debt consolidation is simply the process of merging or consolidating multiple debts into a single debt, explains the credit reference agency Equifax.
Instead, of that series of random dates on which you must remember to repay the balance on different debts or lines of credit, you have just a single date on which you can make scheduled repayments on your consolidated debt. You no longer run the risk of missing a repayment date and blotting your credit record as a result. Your debts potentially become altogether more manageable once they have been consolidated under a single umbrella.
If you are careful and canny in the way you choose to consolidate your debts, you may also gain the benefit of the borrowing costing you less – thanks to a single, reduced rate of interest.
Why consider a debt consolidation mortgage?
That explanation of debt consolidation may go a long way to suggesting why you might want to consider this method of simplifying and streamlining all your debts under a single umbrella – it is more convenient, and you might end up paying less for your additional borrowing.
By switching debt and credit balances to a debt consolidation mortgage, you might achieve both those goals – the convenience of a single monthly payment (which you are probably already doing with your current mortgage payments) and the prospect of paying less in the combined interest on those consolidated debts.
If your many debts and credit repayments sometimes leaving you struggling at the end of the month, a debt consolidation mortgage might give you the leeway you need by improving debt management and giving you a more favourable rate of interest on the necessary repayments – which may now be spread out over the many years of a mortgage term.
As the Money Saving Expert suggests , a debt consolidation mortgage is often a good move – but it isn’t a decision that should be taken lightly.
How does a debt consolidation mortgage work?
If you are an existing mortgage borrower, a debt consolidation mortgage can be arranged by remortgaging your home. To all intents and purposes, this is a new mortgage which combines the payments you are making on your home, together with all the other debts and credit you have paid off thanks to the new mortgage loan.
By remortgaging in this way, you can therefore repay the consolidated debts in one go by increasing the monthly instalments paid on your mortgage (if you have equityThe difference between the value of the property and the amo... in your home).
Since the new borrowing which is used to settle the consolidated debts, is secured against your home (so the lending is a secured loan), the rate of interest on such secured borrowing is almost certain to be considerably lower than the interest you were paying on each of the debts pre-consolidation.
Applying for a debt consolidation mortgage or remortgageRefinancing an existing mortgage with a new mortgage. is likely to involve:
- a valuation of your home’s current market value;
- confirmation of the equity share you own in your home – it’s market value less the amount of your currently outstanding mortgage; and
- the additional amount you want to borrow – which is compared against your income to establish the affordability of any remortgage.
Some lenders may ask for your formal undertaking to repay your consolidated debts as soon as any remortgage is granted.
There may be instances where your current mortgage represents such a good deal that you do not want to jeopardise those advantages by remortgaging. In that case, you might want to consider a second charge mortgage instead.
Can I consolidate my debt as an older borrower?
Remortgaging for the purposes of debt consolidation is rarely a problem whatever your age.
Naturally, any mortgage lender will consider those factors we have already mentioned – the value of your home, the equity you own, and the amount you want to borrow – but some lenders may also want to take into account your age. They may look at your age, income and size of any outstanding mortgage balance and limit the debt consolidation mortgage accordingly.
Other lenders may simply cap the debt consolidation mortgage available to older borrowers – to a maximum loan of £10,000, say.
When getting a debt consolidation mortgage doesn’t make sense
The prospect of consolidating all your debts into one and paying less in interest on the total is likely to appear compelling. But there are certain circumstances where a debt consolidation loan is unlikely to make sense:
- if you cannot afford the increased monthly mortgage repayments – your home is at risk if you default on those repayments, after all;
- the remortgage fails to clear or consolidate all of your debts;
- you end up paying more – because the monthly repayments are higher or the interval over which you need to make repayments is longer – and you are better off borrowing elsewhere; or
- there are underlying problems in the way you are managing your debts – in which case, you may need debt counselling or advice rather than a debt consolidation mortgage.
Should you consolidate your debt by remortgaging?
A debt consolidation mortgage lets you pay off all your debts and outstanding credit in one go. By increasing the size of your mortgage to do so, you may simplify and streamline the repayment of those debts under a single heading – and in some cases stand to pay a lower rate of interest into the bargain.
While these may be attractive reasons for consolidating debt in this way, do remember that your home is at risk if you do not keep up the repayments. That is why is makes sense to seek the advice of a specialist debt consolidation mortgage broker who will be able to help you make the most appropriate decision for your own unique financial circumstances.
FAQs – Should I remortgage to consolidate debt?
What is remortgaging?
Remortgage is the process of switching your existing mortgage to a new lender, usually in order to take advantage of better interest rates or loan terms. It can also be used to access additional funds for home improvements, debt consolidation, or other purposes. When you remortgage, you will need to pay off your current mortgage and take out a new one with different terms. This means that you will need to go through the same process as when you first took out a mortgage, including submitting documents and going through an application process. If you are interested, you can also read about remortgaging to pay off debts in our other article.
Is it a good idea to remortgage to consolidate debt?
It depends on your individual circumstances. Remortgaging can be a good option for consolidating debt if you are able to secure a lower interest rate or longer repayment term than what you are currently paying. However, it is important to consider the potential risks associated with remortgaging, such as the possibility of being unable to keep up with payments or having to pay the penalty for early repayment. It is also important to compare different mortgage provider and their offers before making a decision. If you are interested, you can also read about remortgaging to pay off debts in our other article.
How does remortgaging work?
Remortgaging works by switching your existing mortgage to a new lender, usually in order to take advantage of better interest rates or loan terms. When you remortgage, you will need to pay off your current mortgage and take out a new one with different terms. This means that you will need to go through the same process as when you first took out a mortgage, including submitting documents and going through an application process.
How can remortgage help me consolidate debt?
Remortgaging can help you consolidate debt by allowing you to access additional funds that can be used to pay off existing debts. This can be beneficial if you are able to secure a lower interest rate or longer repayment term than what you are currently paying. However, it is important to consider the potential risks associated with remortgaging, such as the possibility of being unable to keep up with payments or having to pay the penalty for early repayment. It is also important to compare different lenders and their offers before making a decision. It is always better to contact a specialist mortgage broker before starting the process.
What are the eligibility requirements for remortgaging?
In order to be eligible for remortgaging, you must meet certain criteria. Generally, you will need to have a good credit score and a stable income in order to qualify. Additionally, you may need to provide proof of your current mortgage balance and any other debts that you are looking to consolidate. You may also need to provide proof of ownership of the property that is being mortgaged.
What are the benefits and drawbacks of remortgaging to consolidate debt?
The main benefit of remortgaging to consolidate debt is that it can help you access additional funds at a lower interest rate or longer repayment term than what you are currently paying. This can help you save money in the long run and make it easier to manage your debt and credit score. However, there are some drawbacks to consider as well. Remortgaging can be a lengthy process and may require additional fees and charges. Additionally, you may be subject to early repayment charges if you decide to switch lenders before the end of your current mortgage term.
How can I compare different remortgage options?
The best way to compare different remortgage options is to contact a specialist mortgage broker. A mortgage broker can help you compare different lenders and their offers, as well as provide advice on which option is best for your individual circumstances. Additionally, they can help you understand the potential risks associated with remortgaging and ensure that you are making an informed decision.
What are the costs associated with remortgaging?
The costs associated with remortgage can vary depending on the lender and the terms of your new mortgage. Generally, you will need to pay a fee to the lender for processing your application, as well as any legal fees associated with transferring ownership of the property. Additionally, you may be subject to early repayment penalties if you decide to switch lenders before the end of your current mortgage term. It is important to consider all of these costs before making a decision.
How long does the process of remortgaging take?
The process of remortgaging can take anywhere from a few weeks to several months, depending on the lender and the complexity of your application. Generally, you will need to provide proof of income, assets and debts in order to be approved for a new mortgage. Additionally, you may need to have an appraisal done on the property in order to determine its current value. Once all of these steps are completed, the lender will typically take a few weeks to review your application and make a decision.