If you have mounting debts such as overdrafts, credit cards and personal loans, your repayments might be hard to manage. Sometimes, it might feel like you’re never going to be able to pay them off.
But if you own a property, we have some good news for you. Remortgaging could help you to get cash in your pocket, which could help you to pay off your debts. Here, we’ll explain exactly how it works, who can do it and whether it’s a good idea.
What is remortgaging to pay off debt?
Okay, so what exactly is remortgaging to pay off debt and how does it work?! Well, it basically involves doing something called remortgaging to release equity.
Let us explain.
Equity is the amount of your property that you own outright. It might help to think of it as the amount of your property’s value that would go straight into your pocket if you sold it, rather than towards paying back your mortgage lender (mortgage lenders are the guys that give out mortgages).
When you remortgage to release equity, you’re taking out a new, bigger mortgage on your property so that you own less of your property outright (called ‘releasing equity’). Your lender will then give you the difference in cash.
You can use this cash for whatever you want – you could remortgage for an extension, for a new car, for a fancy holiday, to pay your kids’ uni fees… or, to pay off debts!
Remortgaging to pay off debts is known as a debt consolidation mortgage because you’re effectively taking out one new debt (your mortgage) to pay off other debts, ‘consolidating’ them all in one place.
Why remortgage to clear debt?
You might be wondering why you’d bother to remortgage to pay off debt. After all, what’s the point in swapping your current debts for a new one? Here are the main benefits.
1. Lower interest rates
This is probably the biggest benefit of remortgaging to clear your debt. Mortgages tend to have really low interest rates compared to other kinds of loans – interest is the fee a lender will charge you for the pleasure of borrowing their money.
For example, with an arranged overdraft (a type of loan that lets you keep spending when your bank account hits zero), interest rates are usually between 19% and 40% APR. That means you’ll be charged between 19% and 40% of the amount you owe your lender each year.
With a mortgage, however, interest rates are a lot lower. Let’s say you have a two-year fixed-rate mortgage (a mortgage where payments are set at a fixed amount each month) and you’ve borrowed 95% of your property’s value (known as a 95% LTV). According to the Bank of England, the average interest rate would be 3.75% (as of the end of June 2021). The difference is huge!
So, what does this mean?
Well, it all boils down to your monthly payments. Because mortgages have lower interest rates, you won’t have to pay as much interest each month. So, remortgaging to pay off debts could be really handy if you’re currently struggling to afford your repayments!
Just watch out because even though you’ll be paying less interest each month, you’ll probably still end up paying more interest overall. We’ll show you why in a moment.
2. Easier to manage
If you’ve got lots of different debts in lots of different places, it can be hard to keep track of them all, making it easy for them to spiral out of control. Swapping all these separate debts for one larger debt (your mortgage) will make them easier to manage as you’ll only need to keep your eyes on one debt instead of many.
Not only this, but mortgages come with clear repayment plans, which isn’t the case with many other kinds of debts like credit cards or overdrafts.
When you get a mortgage, your lender will give you a plan for how much you need to pay back and when, with the aim of making sure the entire mortgage is paid off by the end of your mortgage term. Often, this will involve fixing your repayments at a set figure for a number of years, known as a fixed-rate mortgage. This means you can better plan and manage your finances.
3. Get back on track
Perhaps most importantly, remortgaging to pay off debts could get you out of a sticky situation if your debts are spiralling out of control.
If you’re behind on payments, you might be facing legal action. You may even be considering declaring yourself bankrupt. By remortgaging and clearing your debts, you’ll be able to stop any further action and start afresh.
If you’ve been struggling with debts for a while, your credit score has probably also taken a hit (that’s a score that lenders use to see how good you’ve been with money in the past). But by settling your debts and swapping them for an affordable mortgage with a clear repayment plan, you’ll be able to start rebuilding your credit score, setting yourself up for future success.
Are there any reasons I shouldn’t remortgage to pay off debt?
Like anything, remortgaging to clear debt isn’t all roses and sunshine. After all, it involves taking out a new, bigger mortgage, which is a big commitment! Here are some things you need to know before taking the leap.
1. Pay more interest overall
Okay, so remember how we said that interest rates are lower on mortgages than on most other kinds of loans? And how that means your monthly payments will be lower? Well, that’s the good part. But you will still usually end up paying more interest overall.
If you’re wondering ‘Huh? How does that work?’ then bear with us a minute while we explain.
Basically, mortgages tend to last for much longer than other kinds of loans – often, you’ll be paying your mortgage off over 25 or even 35 years! This means that even though you’ll pay less interest each month, you’ll be making many more payments than you would with a shorter loan. And ultimately, that means you’ll probably pay more interest over your mortgage term.
Let’s say you want to borrow £10,000;
With a short-term personal loan, you might agree to pay it back over 3 years, with an interest rate of 10%. That means your monthly repayments will be £320.65, a total of £11,543.47 and the total interest paid over those 3 years will be £1,543.47.
If you borrowed the same amount by remortgaging, on the other hand, you might agree to pay it back over 25 years with an interest rate of 2%. This would mean your monthly repayments would be just £42.30 – a lot lower! BUT it would also mean you’d end up paying a total of £12,689.21, with £2,689.21 of interest over the full 25 years – a lot more!
In a nutshell, you’ll have to consider how important it is for you to lower your monthly repayments. If you’re struggling to keep on top of your current debts, remortgaging could be well worth it as it would make your payments more manageable. But if you’re managing to pay off your debts fairly easily, it might be better to stick with things as they are, as this would reduce the amount of interest you have to pay in the long run.
2. Repercussions for missed payments
Remortgaging is a really big commitment, so you’ll need to be sure of what you’re getting yourself into.
Like with any debt, if you miss repayments, this could negatively impact your credit score which could make it harder for you to get other loans in the future.
But most importantly, with a mortgage, your property is used as ‘security.’ This means that, if worst comes to worst and you consistently can’t make repayments, your mortgage lender could seize your home and sell it at auction to try and make their money back. It’s a worst-case scenario and the absolute last resort, but it’s still a possibility!
Remortgaging isn’t the only way you can clear debts, so unless you’re comfortable you’ll be able to consistently pay your mortgage off (often over 25 or even 35 years!), it’s best to look into other options. For example, you may be able to take out a different kind of loan to clear your debts that doesn’t involve putting your house on the line, like a specially designed debt consolidation loan.
3. Reduces equity
Finally, remember that remortgaging to pay off debts involves reducing the equity you have in your home.
Anyone who buys a property is always going to hope that the value of their home goes up. But this doesn’t always happen and it’s possible that house prices could fall instead.
If this happens and you’ve reduced your equity by too much, you could end up with a loan that’s bigger than the value of your property, known as negative equity. This could make it hard to remortgage or move homes in the future.
Plus, bear in mind that reducing your equity could cause your mortgage repayments to climb compared to what you’re currently paying for your mortgage. A bigger mortgage means more interest. And it normally also means getting a less good deal as lenders tend to reserve the best deals for homeowners who have a decent amount of equity.
That said, your repayments will still hopefully be lower than what you’re currently forking out for your other debts. So it’s all about your personal circumstances!
Can I remortgage to pay off debts?
Every mortgage lender is different. So, they’ll all have different criteria when they’re umming and ahhing about whether to let you remortgage to pay off debts.
Just like when you first apply for a mortgage, they’ll look at things like your income and expenses to see if they think you’ll be able to handle the extra borrowing. However, they’ll also look at the following.
1. How much equity you own
You can’t release equity that you don’t have. So, whether or not you’ll be able to remortgage to pay off your debts will depend on how much equity you own.
Most homeowners automatically build up equity over time as the value of their property usually goes up (although this isn’t always the case!). Plus, if you’ve had a mortgage for a long time, you’ll probably have paid back a fair chunk of your mortgage, which will also mean you’ve gained more equity.
To work out roughly how much equity you own, you’ll need to get the following information:
- How much your property is worth. Look at apps like Rightmove or contact the Land Registry to get an idea of how much similar properties are selling for in your area. You can also get your property valued for free by an estate agent (just be aware they might inflate their estimate to encourage you to use them to sell your property).
- Your mortgage balance. Find out how much you still owe your lender by checking your latest mortgage statement. Your remaining balance will usually be in a section labelled ‘principle balance.’ You can also ask your mortgage lender to ask them if you’re not sure.
Once you have this info, you just need to subtract your mortgage balance from your property’s value and that’s how much equity you own.
For example, if your property is worth £200,000 and you owe your lender £150,000, that means you have £50,000 of equity (£200,000 − £150,000 = £50,000).
That said, you won’t be able to release all your equity by remortgaging. Usually, you’ll need to keep at least 5% of your property’s value in equity, as most lenders at the moment won’t give you a mortgage for more than 95% of your property’s value (known as a 95% LTV).
On top of that, remember all the downsides we told you about reducing your equity earlier. Basically, the more equity you keep in your property, the better the mortgage deal you’re likely to be able to get. And keeping more equity is also safer as it makes it less likely you’ll fall into negative equity if house prices go down.
Don’t worry, you don’t have to decide how much equity you want to release on your own. Instead, a mortgage broker (also known as a mortgage advisor) will be able to talk you through your options and help you choose. More on why mortgage brokers are so great in a bit!
2. Your credit score
If you have a good credit score, it will be much easier to get a new, bigger mortgage. That’s because your credit score shows lenders how good you are with money, so they’ll feel safer lending to someone with a good one.
If you’ve managed to keep up with your debt repayments up until now, you’ll have a proven track record of paying back loans on time. So, your credit score will probably be in good shape, which will make lenders very happy.
However, if remortgaging to pay off debts sounds appealing, it might be because you’re having trouble keeping up with your repayments. Unfortunately, if you’ve missed repayments in the past, your credit score will have taken a bit of a hit, which can make it hard to get approved for a remortgage. This can be really frustrating, especially because a debt consolidation mortgage could be exactly what you need to get yourself out of a sticky situation!
If you have a bad credit history, don’t panic just yet. It might be harder to get the remortgage you’re after but it’s not impossible.
There are lenders out there who are happy to lend to people who have bad credit scores or even County Court Judgments (CCJs). Some have mortgages designed especially for this purpose, like Cambridge Building Society and Masthaven Bank. Others don’t have any special mortgages but are happy to consider people with bad credit scores on a case-by-case basis, like Halifax, Royal Bank of Scotland and Santander.
Ultimately, the best way to get a debt consolidation mortgage is to use a mortgage broker who’ll take the time to understand your unique circumstances and find you the best mortgage lender and deal for you. Which brings us onto...
How to remortgage to clear debt
You can just ask your current mortgage lender whether they’d consider letting you borrow more money to pay of other debts. However, we wouldn’t recommend doing that without comparing all the different mortgages and lenders available to you first.
There are over 100 mortgage lenders in the UK, so the chances are there’s a (much!) better deal out there with a different lender. In fact, by switching, you could potentially save thousands of pounds!
If you want to remortgage to pay off debt, the first thing we’d recommend doing is to contact a whole-of-market mortgage broker. Whole-of-market brokers are independent mortgage brokers who can compare all the different mortgages and deals out there to find you the best one for your needs.
Not only that, but mortgage brokers come with a whole host of other benefits. For instance, they’ll save you a ton of time by filling out your whole application for you. And they’ll be able to use their experience to minimise the chances of you getting rejected.
Basically, if you get rejected for a mortgage, this can negatively impact your credit score, which can make it harder for you to get approved for a mortgage or another kind of loan in the future. Mortgage brokers will know which lenders are most likely to accept you given your personal circumstances – there are even brokers who specialise in helping people get mortgages with bad credit scores. So, you’ll be in safe hands!
If you need a little help finding the right advisor, just use our free find an advisor service.
Start your remortgage
Hopefully, our guide to remortgaging to pay off debts has given you a better understanding of whether it’s the right solution for you. But if you need some bespoke advice, remember that you can always chat to a mortgage advisor.
With a bit of professional input, you should be able to get your debts under control.