Remortgaging for Debt Consolidation
Remortgaging for Debt Consolidation
Paul Holland answers frequently Googled questions on Remortgaging for Debt Consolidation
What is a consolidation remortgage?
If you look at your house as a collateral, you can raise a loan against your property for lots of different reasons. Subject to lenders’ criteria something that quite frequently happens is that people raise money against their house to repay other debts elsewhere.
They increase their mortgage to raise a surplus which they use to pay down debts outside of their mortgage.
Is consolidating a good idea?
It can be a good idea, but really we need to look at it on a case-by-case basis. The big pro of consolidating your debt is to reduce your monthly outgoings. If you have unsecured debts, it could make things a little bit easier to manage if it’s all under one roof.
On the other hand, though, it could mean you repay more interest as your mortgage is usually stretched over a longer period than a personal loan or credit card.
So while interest rates are lower on the mortgage, if you stretch that over 25-30 years it’s going to add up. These are the things to consider when you’re deciding what to do.
What’s the process to remortgage for debt consolidation?
Any application for remortgaging has very similar requirements. Your lender will want to confirm that it’s affordable by assessing your income and expenditure. They’re going to make sure you’re creditworthy with a credit assessment. They will check that their security is sound by carrying out a valuation on your house, to make sure they’re happy with the amount of debt you’re putting up against it.
That might be a physical valuation where a surveyor visits the property to look around, or a desktop or curbside valuation where they’ll do their checks without actually bothering you. Generally we’re seeing a lot of these remote valuations nowadays.
What is the difference between debt relief and debt consolidation?
Debt relief isn’t something that we deal with but my understanding is that it’s usually an agreement that you enter into with a third party company. They take all of your unsecured debts, freeze the interest and put in place a monthly payment for you to clear the remaining balances.
You’d enter into a debt management plan (DMP) which will have a negative impact on your credit status. It could make it difficult for you to apply for credit in the future.
Debt consolidation via a remortgage is different. It’s effectively borrowing from a mortgage lender against your property and then using that money to individually settle your debts.
That’s not viewed as negative and it’s not going to impact your credit status at all.
What debt do mortgage lenders consider? Can you remortgage with credit card debt?
Yes – credit cards, personal loans, second charges, store cards and car loans are all normally acceptable. Lenders probably won’t like it if you settle a payday loan with a remortgage – but in fact if you’ve got outstanding payday loans it’s going to be difficult for you to get a mortgage anyway.
Lenders also don’t like you to raise capital from a remortgage to pay an outstanding tax bill or a debt to HMRC. Generally, all other debts will be considered.
A lot of people feel that there is a stigma around debt consolidation – they think it’s negative. But there are many reasons why you might have credit card debt – for educational purposes, for example. You might have a student loan. You might have taken unsecured borrowing to renovate your property and add value to it.
Can you consolidate debt twice?
You can consolidate debt three times or more if you want to. There’s no limit to the number of times you can consolidate debt. Obviously it’s a good idea not to make a habit of it, but there may be a good reason for the debt.
Let’s say somebody bought a property for a cheap price and renovated it extensively. They may have built up unsecured debt throughout that process – they’re then just remortgaging and paying that debt with the additional funds. Ultimately, they’ve made money on the equity of their property versus their original position. So it’s not a bad thing at all.
Lenders look at it on a case-by-case basis. If someone is repeatedly raising capital on a remortgage and racking up more credit card debt, they may start to say no. They’ll be able to see the history of your balances and your remortgage history on your credit file. So it’s just a case of doing things sensibly rather than worrying about how many times you do it.
What else should we consider with debt consolidation?
If it makes sense financially, it saves you money and makes your life easier then it’s something to seriously consider. Obviously you should avoid silly choices like wrapping up 0% finance debt into your mortgage. But there are plenty of instances where consolidation would be a good idea. It’s all about assessing your situation and seeing whether it would make sense.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.