Using the value you’ve built up in your home to pay off debts may seem like an attractive option, since it could reduce the monthly repayments you are making. But it is not always as cost effective as it might at first appear and there are several pitfalls to be wary of.
What is remortgaging?
Essentially, when you move from one mortgage deal to another you are remortgaging. Most people will do this when they come to the end of the discounted period of their current mortgage, after which they are free to look for another deal without paying an early repayment charge.
Remortgaging also gives you an opportunity to increase the amount you’re borrowing to free up funds for a large expenditure such as an extension. When you remortgage to pay off debt it means you are using those funds to pay the people you owe but shifting the debt on to your property.
Is remortgaging to pay off debt right for you?
Increasing the loan on your home can bring you short term relief from your debts. But it may also store up problems in the long run, because you will have to repay that money at some point.
When you are considering remortgaging to pay off debt you need to carefully weigh up how cost effective it truly is. The cost of debt is hugely impacted by the length of time you take to pay it off and mortgage terms are usually around 25 years. This makes borrowing the high amounts needed to buy a home affordable, but it can make smaller debts much more expensive than they need to be.
For example, if you have a personal loan of £20,000 which you are paying off at an interest rate of 10% over five years the total cost will be £25,242. However if you add it to a 25 year mortgage at a rate of 3% you will eventually pay back £28,326.
Even if your monthly repayments will be far lower, it is better to try and find other ways to pay off your debts before committing to a bigger mortgage, such as:
- Working with a debt charity to design a budget that frees up money to pay down your debt or, if necessary, negotiate a debt management plan with your creditors.
- Shifting credit or store card debt to take advantage of the low introductory rates many balance transfer credit cards offer.
Pitfalls to look out for
If you do decide to remortgage to pay off your debts there are several risks you should make sure you’re comfortable with before you start the process, including:
- Mortgage providers will usually want to know why you are increasing your mortgage. If you are using the money to pay off debt it may make them think twice about offering you more.
- If you need to leave your mortgage deal during the initial discounted period you are likely to have to pay early repayment charges which can amount to thousands of pounds.
- The extra money you borrow will be secured against your home, which means if you fall behind on your repayments your property may be repossessed.
- If you borrow too much and house prices drop, you might find yourself in negative equity. That’s when your mortgage is larger than the value of your home, which makes it very difficult to move.
Three ways to increase your mortgage
Moving your mortgage between providers and increasing it as you do, is one way to release some of the value in your home. If you are outside your initial mortgage deal this will give you access to the cheapest interest rates for the entire amount you borrow.
Alternatively, you can stick with your current provider and ask them to give you a further advance if you are still within the initial deal period. This is money they lend on top of your mortgage, which is secured against your home. The interest rate will probably be a little higher on this amount, but it is often a more cost effective option than paying an early repayment charge.
Finally, you can take out a second-charge mortgage. This is a loan available to homeowners which is secured against your property. Even if the loan is a small proportion of the value of your home, the lender can force you to sell it if you fail to make your repayments.
If you are unsure which is right for you, talk to an independent mortgage broker before making your decision.
Working with us
Juggling debts is stressful and they can quickly spiral out of control. That’s why selling your home and clearing what you owe is an option worth considering.
If you want to sell quickly, we can help. We can buy your property in just seven days if necessary. Our aim is to make the transaction as cost effective and hassle-free for you as possible, that’s why we don’t involve estate agents and cover all solicitor fees.
Once we’ve agreed a completion date, we won’t go back on it. That means you know exactly when you’ll have funds in your account and can start planning your next step with certainty.
If you’d like to chat about our service and how it could help you, please get in touch.