Remortgaging involves switching your current mortgage to a new one, and in some cases, you can borrow extra money in the process. This extra money could be used to pay off high-interest debts like credit cards or personal loans.
But before jumping in, it’s crucial to understand how remortgaging works, its potential benefits, and the risks involved. In this blog, we'll explore whether remortgaging is an option for paying off your debt.
What is remortgaging?
Remortgaging involves switching your existing mortgage to a new one, either with your current lender or a different one.
By remortgaging, you may also have the option to borrow more than you currently owe, using the extra funds to pay off other debts.
Can remortgaging help pay off debt?
Yes, it can. Remortgaging allows you to tap into the equity of your home to borrow extra money, which can be used to pay off debts or fund other goals.
However, it's important to note that remortgaging means moving to a new mortgage deal. So, if you’re currently on a favourable interest rate, you might lose it. Or, you could face early repayment charges if you're ending your current deal before the term is up.
How does it work?
When you remortgage to get extra funds, you're essentially increasing the size of your current mortgage. So, you take out a new mortgage for more than what you currently owe. The extra funds are then used to pay off other debts, such as credit cards or personal loans. After this, you only need to make one repayment, as all the debts are combined into a single loan.
The main benefit of remortgaging is that interest rates are typically lower than those of credit cards or personal loans. Additionally, consolidating your debts into one monthly payment can make managing your finances simpler. However, if you take the money out over a longer term, it can increase the total amount you repay
Pros of remortgaging to pay off debt
Some of the advantages to consider include:
- Lower interest rates: Remortgaging may offer a lower interest rate than credit cards or personal loans, which means you could save money in the long run.
- Simplified payments: Instead of keeping track of multiple debt payments, consolidating them combines everything into one. This can help you stay organised and reduce the chance of missing a payment.
- Potential to improve your credit score: If you manage your new mortgage well and keep up with payments, your credit score might improve over time.
Cons of remortgaging to pay off debt
While consolidating debt through remortgaging can be helpful, it's important to be aware of the potential risks:
- Risk of losing your home: If you don’t make your repayments, you could lose your home as the loan is secured against your property.
- Longer loan term: Remortgaging could mean extending the length of your mortgage. While this might lower your monthly payments, you could end up paying more in interest over time as the interest will accure for longer.
- Extra fees: There are often costs involved with remortgaging, such as potentially early repayment charges. Make sure to account for these when deciding if remortgaging is worth it, as these costs can be high.
How to decide if remortgaging to clear debt is right for you
If you’re thinking about remortgaging to clear debt, consider the following before making a decision:
How much debt do you have?
If your debt is manageable, it might not be necessary. But if you have a lot of high-interest debt, it could be a good option.
Compare interest rates:
Make sure the interest rate on your new mortgage is lower than the rates you're currently paying on your debts. If it is, you could save money.
Can you afford the new payments?
Think about whether you can comfortably manage the new mortgage payment, especially if you’re borrowing more than before.
Look at other options:
Remortgaging isn’t the only way to handle debt. You could also consider other debt consolidation loans or methods for managing the debt.
Alternatives to remortgaging
If remortgaging to clear your debt doesn't seem like the right choice for you, there are several alternative solutions that might be a better fit. Some of these include:
- Unsecured loan –An unsecured loan is a borrowing option that doesn’t require security, such as your property. Because there's no security backing the loan, lenders consider it a riskier option, which means they usually limit the loan size and the term to reduce that risk. However, your property won’t be at risk if you default, but it's important to carefully weigh up the potential benefits and risks.
- Secured loan – A secured loan is backed by your property, making it a useful option for consolidating debt. Since the loan is secured, it may offer larger loan amounts and more favorable terms compared to unsecured loans. However, because your property is at risk if you fail to repay, it’s essential to carefully assess whether this is a good solution for you and ensure that the repayments are affordable before moving forward.
Summary
Remortgaging can be a helpful option for homeowners who want to pay off debt. However, it’s important to think carefully about the risks, like the chance of losing your home if you can’t keep up with payments. Before deciding if remortgaging is the right choice, take time to look at your debt, check if you can afford the new payments, and consider all options.
Loans are secured against property - Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Be aware that consolidating debt could extend your repayment term and increase the total amount you pay over time.
