Consolidating your debts into your mortgage lets you either pay off your debts faster, or save on your monthly outgoings by paying over a longer period.
It’s a big move though and one that shouldn’t be taken without solid financial advice before proceeding. A remortgage is a secured loan, whereas short term debts are, more often than not, unsecured.
By getting a remortgage for debt consolidation, you’re essentially shifting all of your short-term debts into long-term debts. Moreover, you’re adding in the security of your home, which is why it’s the cheapest way to pay down debts. Remortgages are nearly always the cheapest way to finance anything.
Find out how much you could shave off your monthly spend through a remortgage.
Choose When You Want Your Debts Cleared
As remortgages are simply moving your mortgage product or provider, you get to choose the repayment terms when you move. That can be up to 25 years, with a few lenders extending past that period, provided you’ll have the total outstanding balance repaid before you retire.
All unsecured debts have to be repaid within a maximum of seven years. Due to the shorter repayment schedule, and higher interest rates, this type of short-term debt will usually have a high monthly payment.
Consolidating your debts with a remortgage lets you move all your balances into your mortgage, and repay that over the term you choose. By extending the repayment terms, you can lower your monthly repayments. Provided you find a good rate, with low to no fees attached, it could even save you money over the longevity of the loan.
That’s dependent on your current debts though, because you could be playing things smart already by switching credit cards on 0% rates, and only paying the 3% (avg) balance transfer fee each time. If you’re not paying interest, you’re not going to save in the long-term. If you are repaying the interest and capital, you are, more than likely, paying more than you need to in interest charges. In the majority of cases, it makes sense to move all your debts into one easy to manage monthly repayment and lower your premiums in the process.
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Set Your Goals for Being Completely Debt Free
Often is the case, lenders are on the back foot to circumstantial changes as they’re inflexible with over-payments, especially for loyal customers who may have got their mortgage a decade ago based on a sole income. Household salary now is likely to have increased since the mortgage origin date.
It’s hard to believe that you can get penalised for actually paying more to your mortgage. If you want to make over-payments so you get the debt repaid faster, they’ll usually add an overpayment fee onto it. If you want to pay more, most of the time, you need to ask the lender to alter the terms of your mortgage to allow you to do that without incurring a penalty. Even at that, it can be restricted to £500 per month penalty free, as an example.
If you’re now earning more and paying more towards a variety of debts to get them cleared off as soon as you can, it’d be much simpler to roll them altogether into one product.
You can then take one of two approaches to clearing your entire debts, mortgage included:
Option 1 – Use a broker who can work with an underwriter to tailor your remortgage so it includes the option to overpay each month. This is often accompanied with a maximum cap, so it’d be best to know how much you’re likely to afford to pay as extra towards your mortgage on any month so you can get a deal with a built-in buffer that allows you to pay more towards your outstanding balance without it being raised again by a fee.
This approach is more flexible as it’s not as demanding as fully committing to a shortened repayment schedule.
Option 2 – Decrease your repayment schedule. Whatever terms you have remaining on your existing mortgage, shorten it. As an example, if you’ve ten years left to run, shorten the repayment terms so it’s repaid in a lower time frame. Careful consideration and forward thinking should be done before choosing this option. Nobody knows what’s in front of them, such as losing a job, an accident, medical problems, ill health and every other setback that could happen that’d put a strain on your ability to repay.
Think of this approach as all-in, as you’ll be fully committed to repay this one monthly fee, every month for the duration of your mortgage.
Our advisors are fully transparent and will work with you to find the best financing option for your circumstances.
Will you qualify?
For any type of remortgage, you’ll need to meet the lending criteria of whichever company you apply to. They all differ on the level of risk they’re willing to approve applications on.
When you’re releasing equity from your home, you will be asked what you want the money for. On the application forms, debt consolidation is an option with the majority of banks, building societies and specialist lenders.
When you’re comparing different offers, it’s important to check the terms and conditions of each offer. Most lenders assess your overall borrowing to work out how much debt you have and weigh that against your total income. They want to see your debt levels being under 45% of your household income, for any other purpose, other than consolidating debts. When that’s the reason for refinancing, the lending criteria may be that they’ll only accept applicants with less than 35% of a debt-to-income ratio.
The same can apply to the Loan-to-Value ratios stated. For any other reason, it’ll be the advertised amount, but for consolidating your debts, the LTV can drop by 10%.
That’s the only main differences to how your applications are assessed. You’ll still need to pass the affordability test, and all other regulatory requirements for secured loans before your application can be approved.
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Alternative methods of debt consolidation
– Second Charge Loans (homeowner loans)
Should you fail to meet the lending criteria of any lender, there are specialist firms that will have different options available. A second charge mortgage takes a similar approach to a standard remortgage, only instead of a first charge being placed on your Title Deeds; it’s instead added as a second charge. All that means is that if a customer defaults, leading to repossession, the first charge mortgage has priority payments from the sales proceeds.
That will be paid in full, provided the sale price is enough to cover it, then what’s remaining will be paid to the company with the second charge. Essentially, the money you borrow using your home as security will prioritise what company gets paid what amount. First charge mortgages will always get 100% of the outstanding balance repaid, if the money is raised from repossession. Anything left after that’s paid, goes to the second charge lender.
There is a risk they won’t get paid and there’s also a risk that if they do, they may not get the full amount. Since they won’t have a guarantee of repayment, there are higher interest fees for this type of finance.
– Unsecured loans
Unsecured finance is risky for lenders, so they’ll charge a higher interest rate. It’s only suitable for debts under £25,000, with some lenders extending the amount to £35,000. The maximum repayment term for loans with zero asset security is seven years. The only repayment model is capital plus interest. There are no interest only options available with unsecured loans.
– Debt Consolidation Loans
If taking this approach, you’d be best to get professional advice from a debt charity rather than working with a debt consolidation company directly, unless it’s from a trusted referral. One method widely used is Debt Management Plans, which is achieved by negotiating with creditors for a fixed monthly payment plan. Debt charities can assist with a variety of free services and plans, although some may have administration charges, whereas a proclaimed specialist debt management company would do the same, but charge for the service.
First charge, second charge, repay faster, or take longer? Find out the best solution for you from our experts in the remortgage market.
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Precautionary Advice before Remortgaging
Remortgaging for debt consolidation purposes can solve your money problems by letting you get back in control of your finances, but it’s also something you need to know you can manage for the long-haul.
Should you feel that you’ll struggle with the temptation of available credit, it’s best to get professional advice on what options are best for you. The reason being if you take a bunch of unsecured debts and then secure those with your home through a remortgage, you will no longer have the option of juggling what gets paid. Payments to any mortgage product must be repaid every month, or your home will be at risk.
If you feel the temptation of spending on plastic or luxury spending in the future will be too strong that you’d fear winding up back on the same debt juggling path further down the road, seek professional debt advice first. There’s no point putting your home at risk if you can make alternative arrangements such as a Debt Management Plan.
All mortgage products do offer lower interest rates, but once the deals signed and sealed, it is difficult to make adjustments. For that reason, you are best to get advice from a knowledgeable expert in the mortgage sector before going ahead and consolidating your debts with a remortgage.
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