If you have debt from multiple sources, consolidating these debts into one loan can help simplify repayments and reduce the amount of interest payable. Loans secured against property via a mortgage can be one of the most cost-effective ways to borrow.
However, shifting your debts to an existing mortgage is not always the best way to raise the cash you need. Instead of asking, “Can I remortgage to pay off debt?” consider the question, “Should I remortgage to pay off debt?”.
In this blog, our property experts weigh up the pros and cons of this approach to debt management.
What Is Remortgaging?
Remortgaging means replacing your current mortgage with another, either from the same lender or a different provider.
You will need to remortgage when your current deal comes to an end, but you can also elect to make the switch sooner if you find a more favourable deal or need to release some equity to pay off debt.
What Is Debt Consolidation?
If you are juggling multiple debts, for example, credit cards and personal loans, you can combine them in one payment. The objective is to simplify your finances and reduce the amount of interest you’re paying. The cumulative interest on multiple loans will often amount to more than that payable on one lump sum.
Can I Remortgage for Debt Consolidation?
Maybe. If you are eligible to remortgage for debt consolidation, any equity you have in your property can be used to pay off your debts via a single payment plan with your mortgage company.
You can remortgage to consolidate debt if you have sufficient equity in your property to increase the amount borrowed against it. If you still owe more than 80% of the value of your home, borrowing more money may be difficult and ill-advised.
How Does Remortgaging Work?
If you decide to remortgage, the process will look something like this:
1. Ending Your Current Mortgage Agreement
If your existing deal is ending, the lender will notify you of this and invite you to make a new agreement. You should hear from them at least several months before your fixed term is due to end. If you fail to remortgage, your loan will be transferred to the standard variable rate (SVR), which is typically higher than a fixed term rate.
If you want to remortgage before your fixed rate comes to an end, contact the lender to determine what early repayment fees will be due and weigh up this cost against the potential savings offered by switching to a new mortgage
2. Request a Redemption Statement
Your lender will provide you with a statement of the closing balance on your account. This is the amount remaining on your mortgage loan that must be paid off — and the amount you will need to secure a new mortgage for.
3. Choose a Mortgage Broker
There are hundreds of high street and online mortgage brokers to choose from. An independent broker will find you the best deal as they often have access to offers that are not available on the open market.
4. Instruct a Solicitor
If you’re planning to move to a new mortgage lender, you’ll need a solicitor or conveyancer to handle the necessary paperwork and transfer the title of the property.
5. Obtain an Agreement in Principle
Once you have chosen a mortgage provider, find out how much they are willing to lend you by completing an agreement in principle (AIP). This can generally be done quickly and easily online. At this point, you don’t need to have decided on the exact remortgage deal you want. The AIP is not a guarantee that your loan application for a specific amount will be approved, but it gives you an idea of what’s realistic.
6. Assess the Cost of Different Options
Before remortgaging, weigh up all the costs carefully. Will a hefty early repayment fee wipe out the benefits of switching to a deal with lower monthly payments? Are there application, valuation and solicitor’s fees attached to your new mortgage? If you are remortgaging to consolidate debts, will the total amount repayable over a long-term loan be significantly more than the total you would pay on multiple short-term loans? Ensure that you find out about all the costs associated with leaving your current deal and setting up a new one before making the switch.
7. Apply for a New Mortgage
Once you have an AIP and chosen the remortgage deal that suits your needs, submit a formal application. You’ll need to provide various pieces of information, such as evidence of earnings, identification and utility bills, just as you did when you set up your original mortgage. The lender will carry out eligibility, affordability and credit checks. They will also arrange to value your house.
8. Complete the Deal
If the lender approves your application, they will send you or your legal representative a formal offer. Your solicitor will request the funds from your new mortgage provider and pay off the outstanding balance owed to your existing lender. They will also register the new mortgage lender’s details with the Land Registry and transfer the title deeds, if necessary.
It can take several months to complete the process if you’re switching between mortgage providers and around one month if you’re moving to a different product with the same provider.
Is Remortgaging to Pay Off Debt a Good Idea?
The answer to this depends on your particular circumstances. If you’re not sure whether remortgaging to pay off debt is the right decision for you, consider the following:
- Your monthly payments will probably be lower. Mortgages are long-term loans, so the interest rate is typically a lot lower than that offered for short-term loans.
- Managing your debt will be simpler. With a single payment to make, it is easier to track your outgoings and identify any missed payments or problems with your account.
- Access to a large lump sum. For most people, property is their biggest asset and some form of equity release is the only way to raise a large amount of money when they need it. Remortgaging could raise tens of thousands of pounds.
- There may be considerable fees for remortgaging. The amount and type of fees due will depend on your mortgage providers (current and new, if you’re switching) but could include an early repayment charge, a deeds release fee and an arrangement fee. Before taking this route, ask yourself, will debt consolidation save you considerably more than you pay in remortgaging fees?
- You’ll end up paying more in the long-term. The monthly payment on your remortgaged property may seem significantly lower than the cost of your current payments combined, which can make remortgaging tempting. However, mortgages are typically long-term loans, which means that you will probably pay a lot more overall than you would with a higher rate on short-term loans.
- You’re putting your home at risk. A mortgage is a loan secured against a property. If you default on payments, your mortgage lender could repossess your home. Remortgaging without a clear plan of how to repay the debt will put your home at risk.
Alternatives to Remortgaging
The costs associated with remortgaging — both in the short and long term — make it an expensive way to consolidate and clear debt. What you save in monthly repayments will probably be far outweighed by the upfront costs and the total interest payable for borrowing money over many years.
Keeping multiple short-term debts and finding a way to pay these off as quickly as you can is often the more cost-effective option.
If this is not possible and you don’t want to incur the cost and stress of remortgaging, selling the property to clear your debts could be a wise move. With a quick cash sale, you will have a lump sum to pay off all your loans and start afresh. There will be no interest accruing, and you can begin to rebuild a healthy credit score.