Can I Remortgage to Pay Off Debts? 2022 Guide
For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.
If you’re a homeowner and you’re struggling with debt, then a remortgage on your property may be able to improve your circumstances.
This can happen, provided that you opt for the right remortgage that is worth it considering your financial situation.
Today, I’ll discuss how to look for a suitable remortgage and whether it’s even a good idea at all to remortgage in order to pay off your debts.
What is a Remortgage and How can it Help Improve My Financial Situation?
A remortgage refers to replacing your current mortgage with a new one.
This could be done just by changing the terms and products involved in your current mortgage with your lender or getting a new mortgage lender entirely.
There are mainly two ways through which you can improve your financial circumstances by getting a remortgage:
- You release equity that is in your property in order to receive a lump sum of money. You can then use this money in order to pay off your debt.
- The monthly repayments for your new mortgage may be lower than your old one. This may free up some money that you can use in order to pay off your debt.
Keep in mind that in order to get a remortgage, you will have to go through the entire mortgage application process all over again.
This means that you will have to keep in mind any application fees that may be involved with applying to a new mortgage lender.
Not to mention that if you’re already in a mortgage, you will have to pay some kind of early repayment/redemption fee to your old mortgage provider when getting a remortgage.
Thus, you must keep these costs in mind when making calculations as to whether or not getting a remortgage would be worth it.
A lender that’s assessing whether or not to give you a remortgage will look at a number of factors. These are mainly your credit record, the value of your property and how much money you want to borrow against that property.
Having a good credit record will definitely increase your chances of securing a remortgage.
If you’ve been making regular payments towards your debt including your old mortgage loan, you will most likely have a healthy credit score.
A lender will also be more likely to provide you with a mortgage if they feel that you will be able to comfortably make your monthly payment each month.
How Can I Tell if Remortgaging would be Suitable for Me or Not?
Remortgaging is not for everyone. Thus, it’s very important that you assess your situation thoroughly before you make this decision.
If you’re reckless and rush into it without doing your research, you may end up in a worse financial situation than you were initially in.
It’s important to scour the market thoroughly in order to find a mortgage lender with the most competitive interest rates.
You must definitely ensure that the lender you’re moving to has a lower interest rate than your current one. This is one of the aspects that will work towards making your remortgage worth it.
The interest rates on mortgages are typically lower than personal loan rates but even so, you must closely assess the interest rates given by mortgage providers to ensure you won’t be paying more in interest in the long run.
Some other things you should keep in mind when considering a remortgage are:
- How long will the mortgage be?
- Will I be able to afford the monthly payment rate?
- Can I afford the early repayment fee to my old mortgage provider as well as the application fees to my new mortgage provider?
- What type of mortgage would be more suitable for me: Fixed or variable?
- Is this really going to improve my financial situation?
While you may qualify for a remortgage on your property, that does not necessarily mean that it’s the best option for you.
You can only remortgage if you have enough equity in your property. Even if you do have enough equity, a remortgage could still prove to be very expensive for you.
If you’re considering a remortgage, I highly suggest that you seek advice from a professional before you enter into any type of mortgage deal.
It’s a good idea to seek advice from an independent debt charity such as National Debtline or Payplan.
They have trained professionals that know the process inside-out and they also provide advice to you free of charge.
What is Debt Consolidation and can I Get a Remortgage in order to Consolidate My Debts?
Debt consolidation refers to the idea of taking a single loan out in order to pay off numerous debts such as credit card debts, personal loans, etc.
Thus, the idea here would be to take out a remortgage against your property in order to pay off all the other loans you have.
In this way, you would only have one creditor remaining and you would only have to worry about monthly debt repayments to them.
While this may seem like a wise decision, there are a lot of things you must consider before consolidating debt using your remortgage.
What are the Benefits of Remortgaging in order to Pay Off Debts?
The obvious benefit of remortgaging in order to pay off other outstanding debts you may have is that your monthly repayments will most definitely be a lot lower.
Not only do mortgage loans have much lower interest rates than credit card loans and any personal loan you may have, but their repayments also occur over a much longer time period.
For example, you may be expected to pay off a certain type of your debt over the course of 5 years whereas you would opt to pay back your mortgage over the course of 20 years.
Obviously, your mortgage payments would be much lower in this case.
Thus, because your payments are stretched out over such a long period of time, they can become a lot more manageable and can free up a lot of money for you to make other purchases.
What are the Risks of Getting a Remortgage to Pay Off Debts?
It’s important to note that although the interest rates for mortgages are lower than personal loans or loans on credit cards, you make payments towards a mortgage for a much longer period.
This means that overall, you will be paying a lot more in interest when it comes to mortgages as compared to other types of loans.
For example, as opposed to paying your loan back in 5 years, you would be paying it back in 20 years. Hence, you would be paying interest for an additional 15 years.
Thus, although your monthly payments will be lower, you will be paying more money overall if you opt for a remortgage to pay off your debts.
The second and most obvious risk is your home.
A mortgage is a loan that is placed against your property. This means that if you’re unable to make your payments towards your mortgage, your home will be used as collateral in order to pay for your debt.
Keep in mind that this is, obviously, not the case with other debts. You won’t be losing your home if you fail to make payments towards your credit cards or your personal loan.
However, as soon as you make the decision of debt consolidation using your remortgage, your home will now be at risk and it will stay at risk throughout the entire duration of your mortgage repayment period.
Considering this, I always advise debtors to never go for this option. You should only go for a remortgage to pay off your debts as a last resort.
In most cases, you have other options available to you. I highly suggest contacting an independent debt charity to explore other options if you’re struggling with debt.
How Difficult is it to get a Remortgage when in Debt?
As mentioned earlier, the process of getting a remortgage is the exact same as getting a regular mortgage application.
Mortgage lenders will judge you on the same criteria as they would for any regular mortgage application.
All mortgage lenders are authorised and regulated by the Financial Conduct Authority and they are obligated to only provide you with a mortgage deal if they feel you will be able to comfortably afford it.
Thus, they will look at your credit history as well as your overall financial situation.
You must also note that since they are authorised and regulated by the Financial Conduct Authority, you can complain to them if a mortgage lender attempts to coerce you into a mortgage deal that you cannot afford.
Keep in mind that the criteria for all mortgage lenders differs and you may be looked upon more favourably by one lender than another.
The fact that you have outstanding debt as well as mortgage debt will most likely reflect poorly with most lenders but if you’ve been making regular payments towards all of them, this could work in your favour.
It’s important to have a plan in mind when applying for a remortgage.
Mortgage lenders will be more likely to give you a remortgage if they get the impression that you have a solid plan in place and you will practice financial discipline in order to make your monthly payments.
Being sincere and honest can go a long way in helping you secure a remortgage.
What are Some Other Options of Taking Care of My Debts Besides a Remortgage?
If you’re struggling with debt, there are several other options you can look towards before you start thinking about getting a remortgage.
Firstly, you can look towards your expenditures and cut down living costs in order to free up some money.
If you have credit card debt, you can also opt to balance transfer to a card with a lower interest rate in order to effectively lower the amount of money you owe.
If you’re opting for debt consolidation, you can look for a personal loan with a relatively low interest rate. It could be very useful in helping you consolidate your debt and paying it off effectively.
You can also contact a debt charity in order to find out if a debt solution such as an Individual Voluntary Arrangement (IVA), Debt Management Plan (DMP) or Debt Relief Order (DRO) could be suitable for you.
While it’s certainly possible to get a remortgage to pay off your debt, it’s often not a good idea.
If you’re considering getting one, I highly suggest that you thoroughly assess your financial situation to ensure that this is indeed the best choice you can make.