Is remortgaging the best way to consolidate your debts?
Most people think of remortgaging as simply updating your mortgage interest rate - which it is - but if you're looking to consolidate your debt, adding it to your existing mortgage is an option available to you - both within an existing mortgage and during your remortgaging process.
When considering your options, seek independent financial advice from a regulated mortgage advisor.
Why consider doing it?
Mortgage rates are almost always considerably lower than those for credit cards and personal loans because they're secured by a property. Right now, mortgage rates are at a record low and house prices are still rising.
If you are struggling with credit card bills or personal loans, this could be an option to help you pay them off, but you need to consider the rate and the term.
Even though a mortgage rate is low, it’s over a longer period of time - the longer you have debt for, the more interest you’re likely to pay.
For example: if you add a debt of £4,000 to your mortgage and you're paying a typical mortgage rate of 4% for a mortgage period of, say, 20 years then you'll pay £4,000 more in interest than you would have before adding £4,000 to your total repayment.
On the other hand, the average credit card rate (as of Feb 2021) is 22.5%. Assume you owe £4,000 on a credit card at 22.5%, if you make fixed monthly repayments, you'll pay around £1,385 in interest over three years.
So, while the 4% interest rate may sound better, if you can afford to regularly repay your credit card over a shorter period of time, it could still save you a lot of money.
How can you make it work?
If you choose to add debt to your mortgage, one way to tackle the longer payment term is to increase your mortgage payments. This will mean you reduce the interest you pay and you'll be free of your mortgage debt sooner. However, if you’re considering this please ensure that the larger repayment amounts are affordable for you and you take into consideration any potential changes with your mortgage interest rate.
It's also important to remember that not all lenders allow you to make over payments and some may charge if you overpay by too much. So make sure you ask your lender about overpayments first – most will allow it up to a certain amount before charges are incurred, but always double-check.
Can I do this when remortgaging?
Yes, absolutely. If you want to consolidate debt, sometimes you can simply ask your lender if you can borrow more on your existing mortgage. The other option is to remortgage and find a new deal.
The most important factor to consider is the amount of money you're borrowing in relation to the current value of your property. This is known as the loan-to-value (LTV). Essentially the lower your mortgage is as a proportion of your current property's valuation the more likely you are to be able to increase your borrowing.
A lower LTV will also generally secure you a better mortgage rate. For debt consolidation on a mortgage most lenders look for a LTV of about 70% or less, subject to it being affordable for you
If you’re considering remortgaging, it’s worth talking to a mortgage broker who can offer guidance and look at a variety of different lenders to find the best deal for you. If you go for a new mortgage there are often fees to be paid– typically around £1,000 but this is often (or can be) included in the amount that you borrow.
Remember that whether you're increasing your existing mortgage or applying for a new one you'll have to prove to the lender that you can afford a bigger mortgage.
Having enough in savings to cover between 3-6 months’ worth of mortgage payments, just in case something happens to you, is always a good idea. Don't forget that if you can't meet your mortgage commitments your home is at risk.
Adding debt to your mortgage is an option if your mortgage is relatively small in comparison to the value of your house and if your monthly repayments are easily manageable. However, if you can, paying off your loans over the shortest period of time possible is usually the cheapest option.
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