What is debt consolidation?
If you are finding it difficult to clear your debts, there's a good chance its because you’re only paying enough to cover the interest being added onto your debt, and not the debt itself. Having a number of different debts such as multiple credit cards and loans with different interest rates can slowly wear you down, especially when the interest begins to accumulate. Ignoring debt is never the way forward, but consolidating it can be a solution to making your money feel manageable again. A remortgage for debt consolidating allows you to take out a mortgage large enough to cover the amount borrowed for the property, along with your existing debts, into one payment.
Is remortgaging for debt consolidation a good idea?
Whether or not you should remortgage to pay off your debts is dependent on your individual circumstances, such as:
- How much debt you have
- How much interest you pay across your debts
- If you have sufficient equity in your property
- Whether you can afford your current debt repayments
When consolidating your debts into your mortgage, your debt-to-income ratio may also be taken into consideration, but each lender will allow you to borrow in line with specific limits.
Why would you consolidate your debts into a mortgage?
With a debt consolidation mortgage, you can pay off the following types of unsecured debts; credit cards, personal loans, overdrafts and payday loans. You may find that the interest rate for a mortgage is much lower than that for unsecured debts like these, so consolidating your debts with a mortgage could substantially reduce your monthly outgoings. Having a more realistic and manageable time frame will also allow you to feel more in control of your finances and comfortable in the knowledge that everything is covered in one monthly payment.
What to consider before remortgaging for debt consolidation?
When remortgaging to pay off your debt, here are a few things to consider before taking the leap.
First things first, there are costs associated with remortgaging which you need to account for. These may include deed release feed, legal fees, early repayment charges or valuation costs. You may be able to add some of these costs onto your remortgage if you are not able to pay them upfront - however, this will increase your overall debt amount and you will pay interest over the full term of the mortgage.
Secondly your income needs to be such that the lender will allow you to take out an extension to your mortgage. Use the mortgage calculator on our website to work out if your earnings are sufficient to cover the debt consolidation payment you need. Keep in mind that lenders will also want to take into account other factors which might affect your ability to make repayments such as childcare costs and car finance agreements.
You may need to check if you are eligible to remortgage at the stage of your mortgage term that you are in. If you are in the middle of a fixed rate, you may need to wait until the end of the term before applying for additional borrowing to avoid paying early repayment charges. If you’re at the end of your fixed-term mortgage, this is the best time to remortgage without incurring additional charges.
Even though consolidating your debts may seem like an extremely attractive option, there may be other options that are more suitable based on your personal circumstances. For example, a balance transfer credit card with 0% interest rate for a period of months. Whichever method of debt consolidation you choose, make sure that it doesn’t lull you into a false sense of security and tempt you to run up further debts again.
It is also important to note that when consolidating your debts into your mortgage, you are moving them into a secured debt. This means that if you fail to pay the new mortgage payments, your lender could repossess your property. So you need to weigh up whether consolidating your debts is worth putting losing your home at risk - only consolidate your debts if you are able to make the new mortgage payments.
To make sure you come to the right decision as to whether debt consolidation with a remortgage route is best for you, we recommend contacting a mortgage advisor. If you would like to find out more about the options open to you, then speak to one of our remortgage experts
here at TaylorMade Finance.
