How To Remortgage Your Home To Pay Off Debt?
One of the most popular reasons people get in touch with us here at Lloyd Wells Mortgages, is that they have some debt that they feel is quite expensive that they want to pay off with their mortgage. There are pros and cons to consolidating debt into your mortgage, which we will cover in this blog.
When we first speak to clients and go through an affordability calculator, one of the areas we will consider are your outgoings. Commitments such as your Sky package or mobile phone bill are generally ignored, but they will look at any loans, credit cards, hire purchases and car finances etc.
We will ask you for the name of any financial institution that you owe money to, how much is outstanding, how much you pay and how long you have left to repay the debt. If you are unsure of what debts you currently have outstanding, we would recommend getting a copy of your credit report and we like to use Check My File.
If you are worried that there are any credit issues such as missed payments, CCJs or defaults, we will definitely ask you to produce a copy of your credit report, because we want to make sure that you are getting the best advice possible.
If you are worried about your debt and need some advice, we would recommend speaking with StepChange who are a debt charity. Their expert advice helps you deal with your debts and get the support you need. You can get advice online or over the phone, and they’ll recommend a range of practical debt solutions based on your situation.
How Consolidating Debt Can Help You
For most people, their mortgage will be the biggest debt they ever have. After purchasing your dream home, you may then put in a new kitchen and bathroom with the help of a loan. For others, it may be purchasing your car using a loan or hire purchase scheme. You may also find that you use your credit card for day to day living and the balance has started to creep up. Whatever the reason you have found yourself in debt, you might start to ask yourself if that is the best way to structure your finances and if you could improve your cash flow each month. For most people, their loans and credit cards are affordable and don’t cause any problems. But if you are looking to rearrange your mortgage, it may be the ideal time to include those debts and reduce your outgoings.
With loans and credit cards typically having higher interest rates than a mortgage, it can make sense to add them on top of the mortgage. Also by spreading the term over a longer period, you will also be reducing the monthly outgoings.
By reducing the amount of money you are paying in interest, you may be able to overpay on your mortgage, with most lenders allowing a 10% overpayment facility each year, thereby paying off your debts and mortgage sooner.
If you are wondering if debt consolidation is right for you, it may help to look at an example of other people in your position.
Nicola bought her first home 5 years ago with some help from her Grandad. Her 5 year fixed rate was coming to an end and she wanted to look at fixing in again for another couple of years. Over the 5 years she has transformed her home, decorating throughout and putting in a new kitchen and bathroom. Although she had completed most of the work through savings, she had built up a small credit card balance.
She told me that the debt was more than manageable, but if she was to increase her monthly payment by £100, it would still take a number of years to clear the debt off.
Her current mortgage was £490 per month and she was paying £45 per month towards her credit card. By combining the two her new payments came in at £440 per month due to lower rates and slightly increasing the term of her mortgage. This has left her £95 per month better off, with no stress of having a credit card debt outstanding.
Possible Disadvantages Of Debt Consolidation
It would be remiss of us to pretend there aren’t possible disadvantages to consolidating your debt.
In the above example, Nicola’s credit cards weren’t secured against her home. By consolidating them into the mortgage, they are now secured against her home. What this means is that if she is unable to make her mortgage payments, she is at risk of repossession. While this is the case for all mortgages, if she was unable to maintain her credit card payments, her home would still be secure as long as she continued to make the payments on her mortgage.
There is also the risk that the debt may cost her more in the long run. As her mortgage is over 23 years, that debt will remain part of the mortgage for 23 years.
If she kept the debt on her credit card, she may have been able to repay the debt over a shorter period.
You may also find that once you have consolidated debt once, you won’t be able to consolidate debt again. The lenders are able to see your last 6 years worth of credit activity on your credit report and if you are consolidating debt, there may be specific questions about if you have done this previously on the application forms.
If you have a habit of building credit up, you may find that you consolidate your debt and then fall back into old habits and take out new loans and credit cards which could leave you in an uncomfortable financial situation.
Advantages Of Debt Consolidation
The first advantage of consolidating debt is probably the most important. It is the peace of mind of knowing you are in control of your finances and not worrying about how you are going to pay for next months bills. This could be the fresh start you need to get back on top of things. Having the peace of mind that you are not in financial difficulty would be hard to put a price on!
You will also find that by having one manageable monthly outgoing, rather than several monthly commitments, you will have a better understanding of how your finances work and give you a stronger ability to budget. This means you can concentrate on the family and your other responsibilities.
As we mentioned earlier, mortgages are at their lowest they have ever been. If you can secure all your debt for a low rate compared to interest rates paid on loans and credit cards, you could be saving yourself £100s!
Alternatively, you can email firstname.lastname@example.org and let us know how we can help you.
We will discuss:
- How much you can borrow
- What that will cost
- What fees can you expect
- How Lloyd Wells Mortgages work
- What insurances you will need
- What documentation you will need to provide
- Next steps
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.