Remortgaging for Debt Consolidation
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Remortgaging for Debt Consolidation Part 1
Kal Woodley talks to us about remortgaging for debt consolidation. Episode one of two, recorded in December 2024.
What is debt consolidation and how does it work?
Debt consolidation, in terms of remortgaging, is where an applicant decides to pay off their debt with one blanket loan – usually secured against their own property under a mortgage.
These debts can be anything from overdrafts to unsecured business loans. It’s essentially a mechanism to consolidate all your existing outgoings under one loan.
Can you explain how remortgaging can help with debt consolidation?
When you come up to the point of remortgaging, it’s important that your advisor or your lender carries out a fact-find. Part of that is to look at all of your outgoings. You’ve got bills and utilities and there may be additional debts like credit card balances, overdrafts and unsecured loans – for example, that sofa you took on finance.
It might be the right time to consolidate those costs into one monthly payment within your mortgage. It can help you with your cash flow on a monthly basis. That’s how remortgaging can help with consolidating your debt.
How many times can you remortgage to consolidate debts?
There is no definitive answer for that. You can remortgage as many times as you want, to consolidate debt. However, there can be penalties for leaving a fixed rate product. It’s got to be ethical as well – continuing to remortgage again and again will probably bring you more financial harm than good.
Everything needs to be assessed under affordability criteria for a lender, and a mortgage advisor will help you to do that. But we also have an ethical duty in advising clients. We will look at whether it’s in your interest to remortgage to consolidate your debt.
What are the key benefits of remortgaging for debt consolidation? Are there any potential drawbacks or risks?
When you consider debt consolidation you need to look at the overall cost of borrowing. Let’s give an example.
You get an unsecured personal loan with a high interest rate – perhaps two or three times your mortgage rate. You might want to consolidate that under a mortgage, and you can afford it under a remortgage because effectively the interest is less.
That could be a key benefit for yourselves. You’d be paying off that personal loan and on a monthly basis, your cash flow is a lot healthier. But it’s really important to understand that if they are short-lived benefits, that may not be the right thing for you.
You need to make sure you are consolidating the right type of debt. Effectively, you’re adding more debt to your mortgage, which therefore means you’ll be paying it off over longer than you may have planned. You might have personal loans that would be paid off in two or three years, but you’ll now be repaying that debt for the rest of your mortgage term. It could be a short term gain, but not in your interest long term.
Another potential drawback is that consolidating the debt under your current mortgage may completely knock out affordability for your mortgage. You may not be able to afford the new borrowing under the current mortgage and you then have to switch lenders.
Then you’ve got the setup costs for that new mortgage. Perhaps you had a nice low rate but consolidating puts you with a new lender at a higher rate. There are real pros and cons and it’s a bit of a minefield. You need to take a deep breath, and really look at the potential benefits and disadvantages of remortgaging.
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How do I determine if remortgaging for debt consolidation is the right option for me? What factors should I consider when deciding whether to re-mortgage for debt consolidation?
The easiest way is to talk through your approach. Whenever a client comes to me wanting to consolidate their existing debt, we do a full fact-find. We look at proof of income and check what the client is able to afford on their mortgage, should they need to consolidate their debt.
As part of that fact-finding process, I get a list of all of their statements and debts. That could be credit cards, overdrafts, personal loans, financing on furniture… I put that all down on an Excel file.
I have two columns – the monthly payment for that debt and the overall debt on each one. Then we look at whether any debt will be paid off in the next six months. If so, it’s not within your interest to consolidate that.
We then look at the monthly cost of that debt. Perhaps it’s £100 per month but there is no interest associated with that debt – it might be on a 0% APR credit card. Again, that is not the right type of debt to consolidate. By moving that to a mortgage, you’d pay interest on that debt where you weren’t before. It’s not in a client’s interest to remortgage that because there’s no cost to finance that debt.
I’m usually then left with chunks of debt that might have two to five years of payments attached. If it’s on a credit card and we’re looking at 30% APR, and you’re not going to pay it off in the next six months, we can fix that into a remortgage product.
Those are the candidates I would look at and possibly recommend for consolidation. Again, it’s got to be affordable, and that’s where a good fact-find comes in. We disqualify anything that’s not appropriate or has zero interest. I insert other debts one by one into the remortgage, and keep continually reassessing the monthly mortgage repayments to check they are still affordable.
What types of debts can be consolidated through remortgaging?
We tend to avoid any type of structured debt – such as where you buy a sofa and pay off what you owe. If worst comes to worst, you can sell the sofa to clear the debt.
Unsecured debt like credit cards, personal loans and business loans are usually the candidates I look for in qualifying for debt consolidation. These types of debts are usually a lot more volatile, have no structure and usually have higher costs and higher interest associated with them.
Will remortgaging for debt consolidation affect my credit score?
That’s a hard one to answer. When you increase your mortgage, you’re borrowing more – whether it be for equity release or debt consolidation purposes, borrowing more will always affect one’s credit score.
But maintaining those monthly payments would alleviate any detrimental impact to your credit record going forward. It’s pros and cons. If you haven’t consolidated your debt, you may not be able to keep up with your monthly payments, and your score will take a hammering. So it’s important to consider both sides.
How does the interest rate on a remortgage for debt consolidation differ from other types of loans or credit?
Mortgages are structured products. They’re secured against the bricks and mortar of your house. It’s afforded by your income, so I would say it’s the safest structured product there is.
When you look at credit cards or personal loans, there is no security there. There is nothing you can sell to pay back the debt. It is all about your ability to afford the repayments. A consequence of that is the risk profiling on those products. Credit cards are notoriously known as expensive, and now in December 2024, interest rates are around 30%, if not more.
The issuer of the credit card has given you that amount of money to spend unchecked, but there is a risk associated, so they charge you an interest rate accordingly.
When we look at debt and borrowing, structured finance is always a lot more cost-effective than unstructured finance like loans and credit cards. The payment terms for these are also a lot shorter, while a mortgage term could be 25 or even 40 years.
You’ve demonstrated how a mortgage broker can help, but have you got anything else to add?
Working with a mortgage broker on debt consolidation is a huge plus. Some applicants do come to me struggling with their monthly payments. You need someone to help you look at the overall picture objectively.
It can be hard to tell a client that certain debts are good to refinance under a consolidation remortgage, but not all debts. They want it all thrown onto the mortgage, but that’s not the approach a mortgage advisor should take.
At the end of the day, we want you to afford your monthly payments, and not add on any detriment for yourself. There’s some debt we can take on and some we can’t. We will help you navigate the right lender for you, taking all emotion out of the process. Working with a mortgage broker with debt consolidation is vital, because you need to approach it objectively.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
