Remortgage to pay off debt
Published 16th August 2017
Remortgaging to pay off your debts
Refinancing debt with a remortgage is a common practice for many of our customers. As loans secured against a property (a mortgage) are almost always the cheapest way to borrow, we see plenty of cases where we save people LOADS of money in interest or reduce their monthly outgoings drastically. The impact of consolidating can really change the lives of those who have gotten into increased levels of debt and are struggling to keep up.
You can only do this if you have enough equity in your property. Currently the maximum loan to value (LTV) is 90% - so if your property was worth £100k the total maximum borrowing including your existing mortgage, would be £90k. If your current mortgage is £85k, then the most you could consolidate in the current market would be £5k. If your house was worth £200k and your current mortgage was £110k, then you could borrow up to £180k, so a further £70k would be available.
As an example, let’s say you have the following debts and enough equity in the property:
Consolidated into one mortgage (same rate and term):
NOTE: These figures are all approximate, an illustration showing exact figures specific to you will be given in the research & application stage of your enquiry, through an official Key Facts Illustration.
Saving refers to monthly outgoings – stretching unsecured debts over a longer term despite the rate being much lower, could result in you paying more interest in total. This exercise is about minimising your outgoings to a more manageable level on a month to month basis. We used 4% as an indication, but depending on the equity you’ll have remaining in the property and the LTV, you could get a much lower rate than this. Check out our repayment tables for an idea of how your rate will affect your outgoings.
To that end, you could even change the term on the mortgage to suit your monthly budget and repay the total debt quicker or stretch it over an even longer period to reduce the cost further. The effect of this can be seen here:
Qualifying for a debt consolidation remortgage
In order to get a remortgage to consolidate your debt, you’ll need to make the same type of application as for any remortgage, but with a lender that allows capital raising to pay off debts at the LTV you are looking for. There are many reasons for remortgaging and raising extra cash, and each lender will have a different opinion on the maximum they are prepared to lend – see the table here
You’ll also need to pass the credit assessment (credit search and score with most lenders), and be able to prove you can afford the new loan. Credit scoring is different for every lender, some are strict and demand clean credit history, others more relaxed and accept adverse credit - but be prepared to pay higher rates. Affordability is also calculated differently by each lender, but as a general rule, 4x your annual income is about the limit (although some lenders go to 5x).
Ask your adviser to calculate this for you and put you with the lender best suited to you, and with the best rates.
What other debt consolidation options are there?
A remortgage will almost always be the cheapest option, but if for some reason it’s not possible or your circumstances mean leaving your current mortgage as it is would be the best option (for instance if you have an amazing rate), then you could consolidate the debt on a secured loan, or even on an unsecured loan, see this article here for more info.
Secured loan rates tend to be much higher than mortgage rates, being anywhere from 7%-30%+ depending on your credit score, but you can still take them over as long a term possible and in theory borrow as much as you like (within limits of LTV and affordability).
Unsecured loan rates can be as high if not higher than secured, from 6% up to sometimes over 50%, but you are usually limited to a maximum term of 7 years and maximum borrowing of £25k – this means if you are consolidating a large amount of debt then the repayments are likely to be much higher than for a longer term on a secured loan or mortgage.
If you're ready to make an enquiry please fill out our quick form below and a mortgage expert will be in touch ASAP. If you require immediate assistance please call 0800 304 7880.