Using your home’s equity as capital to repay any outstanding unsecured debt such as credit cards, overdrafts and personal loans is a completely legitimate way to lower the interest on your repayments and get your debt under control, but it’s not a get-out-of-jail-free card for debt. Read on for some important advice regarding using a remortgage as debt consolidation.

What is a debt consolidation remortgage?

A remortgage is an excellent way to turn earned equity into ready cash. If the value of your property has increased since you bought it, or you have paid off much of your mortgage in intervening years then you may be able to secure a larger loan on the property at a low interest rate.

Using the cash to pay off all your other borrowings is called debt consolidation, so called because it brings all your debt into one place (consolidating it) – and that place is the remortgage.

What are the pros and cons of a debt consolidation remortgage?

Assuming you can meet the criteria to get one, a debt consolidation remortgage can be an excellent way to bring your outstanding personal debts under control. Some of the advantages include:

  • Paying off all outstanding credits, thus stopping any further action from them, from threatening letters through to court action.
  • Turning an array of direct debits and other outgoings into one single monthly repayment that’s easy to administer.
  • Lowering the amount of interest you are paying to a far more reasonable amount, effectively dropping the monthly hit by hundreds if not thousands of pounds!
  • Helping rebuild your credit rating after months (or even years) of damage.
  • Avoiding insolvency procedures, such as an individual voluntary arrangement (IVA) or bankruptcy.

However, it’s not all upside and a debt consolidation remortgage should not be entered into lightly. Some disadvantages include:

  • Securing debt against your home can mean the loss of your house if you fail to make payments.
  • Potential difficulty in obtaining the remortgage if your credit history is bad.
  • Potentially larger amounts of interest repaid in the long term.
  • Tying into a long-term debt that may restrict your options later in life.

How does a debt consolidation remortgage work?

Like other remortgages, a debt consolidation remortgage is a new secured loan (mortgage) that is tied to your home. There are two options available to you:

  • Full remortgage – this is where your remortgage covers your existing mortgage in full as well as any extra money you need for the debt consolidation. For example, if you had an outstanding mortgage balance of £74,000 and other debts totaling £33,000 then you would look for a full remortgage of £107,000. Your current mortgage would end, and you would have one monthly repayment to your new mortgage provider. 
  • Second charge – a second charge remortgage is an additional secured loan placed on your property that doesn’t interact with the original mortgage. Using the figures from the example above, you would take out a second charge remortgage for £33,000 and have two loans secured on the home. You would have two monthly repayments to make – a continuation of your current mortgage and the new direct debit for the second charge remortgage. 

In order to get your remortgage, you should speak to us at The Mortgage Hut. Our specialist debt consolidation remortgage advisors would work with you to find the best deals available and help you choose the right provider. 

Obtaining a debt consolidation remortgage

For many people looking at this option as a way out of spiraling debt, the largest problem is their current credit score and affordability rating. It can be a bit of a catch-22 situation: you need the remortgage to pay off debt, but the debt is making it so you look like a bad prospect for the remortgage.

It’s important that you speak to a bad credit specialist at The Mortgage Hut if this is the position you are in. Our expert team are able to give you advice regarding bad credit mortgages and will be able to help you find a lender who can see past the poorer credit history to make you a mortgage offer than works for you.

The size of your remortgage

As with any remortgage, the size of your borrowing that can be placed upon your home is limited. With a debt consolidation remortgage, this limit is likely to be 90% LTV (Loan-to-Value) or more. This means that if your current mortgage represents 70% LTV on the current fair market value of your property, then the most you will be able to release will be 20%.

Simon owns a flat that has a current market value of £120,000. His mortgage balance stands a little above £58,000 and he has £31,000 of other debts that he wishes to clear with the consolidation remortgage. In total, his new remortgage would need to be for £89,000 – well below the maximum threshold of £108,000 (90% of his property value). It is likely that he can obtain the remortgage he needs.

If Simon owed another £20,000 – either on his existing mortgage, with other debts, or a combination of both – then he would have been looking for £109,000 in total and would have been unlikely to raise the whole value.

It doesn’t matter if you go for a full remortgage or a second charge on the property, the combined total is what would matter and in both cases the full LTV on your home would be the same.

For a greater understanding of LTV, equity and how they impact a remortgage, read our Guide to Remortgages.

Short term interest vs. long term interest – how the numbers stack up

Most personal debts and credit cards have short term interest rates. These numbers are far higher than you will see for most mortgage products and may be significantly responsible for your debt crisis.

On the face of it, interest rates can seem simple, but some complexity does lurk below the surface. Take a debt of £10,000 and the following breakdowns:

  • Loan A: With a short term interest rate of 22% over three years, the monthly payment will be £381.90, and the total interest paid will be £3,748.56.
  • Loan B: A similar short term interest rate of 19% over five years will lead to a monthly payment of £259.41 and an interest total over the entire term of £5,564.33.

It’s easy to see from the above figures that the short term gain of lower monthly payments with loan B actually means far more interest is paid overall. The monthly payments in loan A are harder to meet, but mean the loan is gone two years earlier and the interest savings are significant.

Now, compare both to a mortgage at 3.4%:

  • Loan C: A mortgage with interest rate of 3.4% over twenty-five years leads to a monthly payment of only £49.53 and an overall interest calculation of £4,858.29

Replacing debts similar to loan B with a debt consolidation remortgage similar to loan C is going to be a win-win situation: not only are the monthly repayments far easier to manage, but the overall interest paid is smaller.

Fixing debts like loan A however is not so clear cut. Yes, the monthly repayment is more than seven times easier to manage, but over the whole term a lot more interest will accrue.

In truth, most debt consolidation remortgages will be a mixture of loan A and loan B types, where the monthly payments will definitely be easier to budget for, but the interest on some debts will raise while others lower.

For most people seeking a debt consolidation mortgage, however, the long term interest is a far smaller concern than the real world impact of cutting hundreds of pounds off their monthly outgoings.

Getting a debt consolidation remortgage with The Mortgage Hut

In truth, often the hardest part of getting a debt consolidation mortgage is being able to prove affordability. With a lot of debt, the chances are that your disposable income each month is close to zero, and that doesn’t bode well for obtaining a remortgage. Of course, we can help.

At The Mortgage Hut we work with mortgage providers who are able to apply common sense over the pure number crunch. They will understand that your disposable income will immediately improve once you are freed from paying hundreds (or even thousands) out each month on high-interest loans. With a good advisor (and our team is made up of excellent advisors!) you will be able to put through a successful application for a remortgage in no time.

Read more of our articles on remortgages and bad credit mortgages for more information and if a remortgage sounds like the right help for you, contact us right away. Fill in our contact form or simply pick up the phone and we’ll get your finances back on track as fast as possible.

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