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Should you remortgage to consolidate your debts?

If you’ve racked up a lot of debt and are finding it hard to meet the minimum payments, you may have considered remortgaging as a way to consolidate your debt. This could not only help to reduce the debts owed but may even result in a better mortgage deal. But is it really that simple? Is remortgaging a good way to consolidate your debts or should you find an alternative option?

What is debt consolidation?

Debt consolidation means you can merge lots of debts into just one debt. You might, for example, have unpaid credit card bills, home shopping accounts and a car loan. Instead of struggling to make the monthly payments for each one, consolidating them makes the debt more manageable and reduces the amount you have to pay every month. Instead of worrying about numerous bills to pay each month, you can focus on paying one amount. With a lower amount to pay, it also gives you a bit of breathing space to try and get back on track with your normal finances.

How can remortgaging be beneficial?

When you remortgage, your current mortgage is replaced with a new one. You can either change the mortgage product with your existing lender or find a mortgage deal with a new lender. With the current low interest rates, you should be able to secure a better deal with lower monthly repayments. This allows you to use the extra money you’d usually spend on your mortgage to repay some of your debts.

Another way that remortgaging can help is by using some of the equity that’s tied up in your home. When you release the equity, you’ll receive a lump sum, which you can then use to repay some of your debts. With house prices in the Bexley/Bexleyheath area having increased substantially over the last decade and with the mortgage repayments you’ve already made, you should have a significant amount available to you as equity.

What are the pros and cons of remortgaging to consolidate your debts?

As with every financial transaction, that are pros and cons to consider before you make a decision.

Advantages

  • Remortgaging gives you two ways to repay some of your debts — using the equity in your home and by freeing up money with lower monthly mortgage repayments.
  • You can usually borrow more with a remortgage than you can with a personal loan.
  • A remortgage offers lower rates and a longer repayment term than an unsecured loan.

Disadvantages

  • Using the equity in your home means you take on a bigger loan.
  • You may have to pay early redemption charges for your existing mortgage — check this with your lender.
  • You need to factor in the additional costs, such as the arrangement fee, legal costs and valuation fee.
  • Your short-term debt becomes a long-term debt and, in the long run, you might end up paying more due to the interest charges.
  • Credit cards and personal loans are unsecured but a mortgage is secured against your home. This means if you fail to make your monthly mortgage repayments, you risk your home being repossessed.
  • If you have a bad credit rating, you may have to pay higher rates.

What other options are there?

Using the equity in your home may seem like an easy way to repay some of your debts but you need to consider the downside of doing this. By releasing the cash, you add this amount to your outstanding mortgage and have a more sizeable loan. This could make your monthly repayments higher than before. Whilst you can initially repay your other debts with the lump sum, you then have to make sure you can cover this extra monthly amount.

You also need to take into account the length of the mortgage term and extra costs involved with a remortgage. Do these still make remortgaging worth it or are you better off with an alternative option?

Transfer your credit card balance

You could, for example, transfer your credit card balance to a new credit card with a lower interest rate. Many new providers offer interest-free periods as their introductory offer. Without having to pay so much interest each month, you can concentrate on clearing the debt instead.

Get an unsecured loan

A personal loan is unsecured and the application process is usually easier than for a remortgage. The loan term is much shorter than a remortgage and the rates tend to be higher, though. This is because lenders are taking a risk by giving you an unsecured loan.

Enter into a debt management plan

Speak with your creditors about your escalating debt. They should be able to arrange a payment plan for you, which will start to reduce your debt on a more manageable scale. This benefits your creditors because they know you will be paying a certain amount each month. It helps you because it removes the pressure of having to find the full amount due each month.

Extend your mortgage term

You might be able to increase the length of your existing mortgage term. Although this prolongs your debt to the lender, it spreads your loan out so that you can make lower monthly repayments. You can then use the money you’ve freed up to repay some of your other debts. Speak with your lender to find out if this is a possibility.

Speak to an expert

Before you decide what to do, seek professional advice from your mortgage broker. He or she will ascertain whether remortgaging to consolidate your debts is the right choice for your circumstances or whether you should opt for a different solution.

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