Homeowners have a variety of options that they can look at when it comes to mortgages, especially when they are reaching the end of their term. The most popular choice is always a remortgage, where you take out a new mortgage to replace your old one, often with a better deal.
That said, not everyone will look to get a better deal. Some will remortgage to release equity or more specifically, remortgage for home improvements, whilst others may look at an alternative to remortgaging by way of product transfers.
This is where you remain with your existing lender and switch to a new product (mortgage) with them. You can learn more about product transfer mortgages in our article on the topic.
Another option that we come across often, is debt consolidation remortgages. In taking out a remortgage to consolidate debt, you are merging your unsecured debts (such as credit cards, loans etc.) into one more manageable monthly mortgage payment, lowering your outgoings.
Taking unsecured debt and securing it against your home is a complex process that requires expert help. You should always take professional mortgage advice before proceeding with a debt consolidation remortgage.
If your mortgage advisor determines that a remortgage to consolidate debt is the best option for you and you meet the criteria for this, you can only do so with enough equity sitting in your home. Equity is of course the difference between the value of the property and your current mortgage balance.
The reason that you need that equity, is because much like a remortgage to release equity, you will use a lump sum to pay off your unsecured loan debts, with those costs instead merging into your mortgage balance, giving you more to pay back over a longer term.
You will be paying interest on a much longer duration than you previously would have, meaning you will no doubt be paying back more overall.
This entirely depends on how far you are into your term. In principle, people technically do remortgage early, usually going through the process 6 months in advance so that their new deal starts as the old one ends. The issue with remortgaging earlier than this, is that it is quite costly.
Anything earlier than that 6 months may see you with an early repayment charge and these are not cheap. If you are only 2 years into a 5 year fixed-rate mortgage, it is very likely that you will have to pay one of these.
Whilst in some situations it may prove viable, remember that you would be paying a lot of money to not only lose out on the mortgage deal that you are currently on (which will likely be cheaper overall for you), but the money you are spending on the ERC, could have just been used on your debts.
Of course it all depends on your situation and it will always be recommended that you speak with a mortgage advisor to determine that this is the best course of action for you, before actually undertaking it. There may very well be a better option out there for you, such as a further advance.
A further advance is a form of additional borrowing, where you borrow more money from your current mortgage lender, typically at a different rate of interest from your primary mortgage.
Much like a debt consolidation remortgage, this will spread your costs across your term, but with lower interest rates than a personal loan. Whilst a further advance is a good alternative for a remortgage usually, being used for home improvements, it’s not necessarily right for debt consolidation.
Remember that you are securing this extra debt to your home, meaning if you are unable to keep up your payments, you risk falling into arrears and facing repossession.
That said, this allows you to have a means of paying off your debts if you are not yet able to take out a remortgage, say if you are not yet out of your fixed or introductory period.
Speaking to a mortgage broker will allow you to accurately evaluate all of the options available to you.
As is the case with any mortgage options, there will be both benefits to this, but also a lot of risks. Of course the biggest benefit to remortgaging to consolidate debts is that you will lower your overall monthly outgoings into one manageable mortgage payment.
Your mortgage payments will increase as you are borrowing more, however your monthly payments to the credit providers that you have consolidated will stop.
The flip side to this is that you are increasing your mortgage amount so will be paying back more over a longer term. Even still, this can allow you to have much more free income to play with or to overpay on your mortgage, if appropriate.
As said, you will pay more overall by consolidating your debt. This is because although the mortgage interest rate will be lower than let’s say a personal loan. You’ll be paying the lower rate of interest for many more years, making this more expensive in the long run.
It also puts significant risk on your home, as all of your unsecured loans will now be secured against your home.
This means that if you fall into arrears after missing any payments, you could face the risk of repossession. It’s because of this that remortgages to consolidate debt should be carefully thought out in advance. Is it really worth risking losing a family home, to consolidate your debts?
This is the burning question. Sure, you can do it but should you do it? Well this is entirely dependant on your situation. Whilst it is certainly very risky and should only be looked at in extreme circumstances, it can still prove beneficial and help you to improve your financial state.
Again though, this should only be done after speaking to a qualified mortgage expert. Our mortgage advisors are more than happy to discuss these sorts of mortgage routes for you during your free mortgage appointment and will recommend an alternative first, if there is one for you.
You should think carefully before securing other debts against your home. By adding your unsecured debts to your mortgage, which is secured on your home, you are potentially putting your home at risk if you cannot make the required repayments.
Although the total monthly cost of servicing your debt may have reduced, the total cost of repayment may still have risen as the term of your mortgage is longer than it may have taken to repay the debts originally.
Last edited 31/01/2023