Remortgaging for Debt Consolidation
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Remortgaging for Debt Consolidation Frequently Asked Questions
Michael Webb talks us through our Remortgaging for Debt Consolidation.
In 30 minutes, you’ll know a lot more about getting your Remortgaging for Debt Consolidation sorted.
What is debt consolidation and how does it work?
Debt consolidation is basically taking lots of individual debts and putting them into one debt. With remortgaging for debt consolidation that would typically mean taking unsecured debts like an unsecured loan, car finance and credit cards, bundling them up together and adding it to your mortgage – which is then secured on your home.
How can remortgaging help with debt consolidation?
When you remortgage for debt consolidation, you’re trying to make your monthly outgoings cheaper. So if you have a loan and credit cards on high interest rates, with a debt totalling £20,000, you might remortgage for your current mortgage amount plus the £20,000.
The monthly payment will be less in total than your current mortgage amount plus all those unsecured debts. It’s a way to help with monthly cash flow. But there are lots of things to consider, as I’m sure we will touch on.
What are the key benefits of remortgaging for debt consolidation?
The key benefit is monthly cash flow. It will keep the monthly cost of your debt down.
Let’s say you were paying £600 a month on your mortgage and you had £400 a month going out to unsecured debts. Adding your debts into the mortgage might then only cost you £700 a month in total, rather than £1000.
That’s not a specific example, it just illustrates what people are trying to achieve with debt consolidating.
Are there any potential drawbacks or risks associated with remortgaging for debt consolidation?
There are lots of potential drawbacks and risks. The main drawback is that you’re taking something that is unsecured and securing it against your property. It puts your property at greater risk because there’s more debt secured against it.
You’re also taking short-term debt and turning it into long-term debt. So whilst it is cheaper on a monthly basis, paying the debt back will cost you significantly more in the end.
Increasing the debt secured against your property means there’s the increased possibility of your home being repossessed, if you’re unable to pay the mortgage. Plus, there’s less equity in the property as well, should you need to sell it.
How do I determine if remortgaging for debt consolidation is the right option for me. What factors should I consider?
In my opinion this should only be done through a very strict advice process. Most brokers’ compliance departments will have added requirements for debt consolidation mortgages.
To determine whether it is right for you, sit down with a mortgage broker with all your documents and do the maths. We will look at the costs vs the benefits to decide what’s important to you. It’s all about whether the monthly reduction in outgoings is more important than getting the debt paid off.
What types of debts can be consolidated through remortgaging?
Typically it’s unsecured loans. You may have some car finance – although to some extent that is secured against the car. You can still consolidate motor finance, plus credit cards.
However it’s very unlikely that you will be allowed to consolidate 0% credit cards. If you’re reaching the end of a 0% term we still need to assess whether it’s suitable to consolidate, when you could potentially transfer it to another card at 0% for a small fee.
It’s a complex conversation that needs real attention from both the broker and the individual to ensure that you are getting good advice.
Will remortgaging for debt consolidation affect my credit score?
Any credit applications that you do short term will affect your credit score. It could be very slight or quite significant, depending on what you’re doing.
The remortgage application will marginally affect your credit score. But once you settle the debts that should positively affect your credit record. There should be some improvement because you’re paying off one or multiple debts on your file.
How do interest rates on a remortgage for debt consolidation differ from other types of loans or credit?
The interest rate on a remortgage will be a mortgage interest rate. If we take 0% credit card transfers out of the equation, mortgage rates are typically cheaper than unsecured debt rates. The reason is that there’s security on the mortgage – which is the property. On an unsecured loan there’s no security: there’s nothing they can take back.
If you default on an unsecured loan, it’s a big legal process but there’s nothing they can take from you. Interest rates are typically lower, but the borrowing is much more long-term. So it’s that balance of monthly outgoings versus getting the debt settled in the short term.
What’s the process of remortgaging for debt consolidation?
The remortgage process is the same – you’d apply to a lender. They’d ask for documents and you’d outline that you’re paying the debts off and they’d consider your application.
You would need to evidence what the debts are and the interest rate on them, with statements and assessment figures. So if you have a number of debts you’re going to need significant amounts of paperwork for the broker and lender, so we can give correct advice.
At the back end, the remortgage would be for more than your current mortgage because you’re borrowing to pay off those debts. The solicitor would then have a surplus of funds and instructions of what to do.
The solicitor may be instructed by the new lender that they are to settle the debts, which may well incur some additional fees – but debts usually need to be quite significant for it to work this way. Otherwise, the lender would just transfer the surplus funds to you to pay off the debts yourself.
Obviously there are elements of risk involved, and lenders may well put things in place to negate these. They may check that your debts have been settled – and if not, they may find you in breach of your mortgage offer conditions.
In the past, perhaps people have said they’re going to pay these debts off, have borrowed an extra £30,000 to do it and when lenders have checked, the debts haven’t been settled. Lenders can now check electronically that you have cleared the debt.
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Are there any specific eligibility requirements for remortgaging for debt consolidation?
The main part is making sure the debts are eligible to consolidate. So anything with less than 12 months to run can’t be consolidated, and anything that’s on 0% interest is not eligible. It just doesn’t make financial sense to do it in these scenarios.
No adviser should recommend those and compliance departments would prevent you from doing that, because it would be bad advice.
How long does it typically take to complete the remortgage process for debt consolidation?
With the typical remortgage process, it will take a couple of weeks to get the mortgage offer and then it will be completed as quickly as the legals can be done. That is usually between three and 12 weeks.
A lot of people will do this as part of remortgaging when their fixed rate ends. Usually they’re doing that anywhere between three and six months ahead. Consolidation will just happen on the remortgage as they get there.
What costs and fees should I expect when remortgaging for debt consolidation?
It’s just the usual remortgage costs, really. There may be a broker fee, a valuation fee and, depending on the lender, there may be legal fees.
Some products have free legals or cashback to cover those. As I mentioned earlier, if the mortgage offer states that the solicitor needs to pay the debts off, there will likely be additional fees for doing that. It will fall outside the scope of free legals.
Will I have to pay any penalty fees if I choose to remortgage for debt consolidation?
You need to check your terms and conditions on two things – your current mortgage and your debts. A lot of people will tie this in with the end of their fixed rate and their standard remortgage anyway. But if you’re doing it within your fixed rate period, there’s likely to be an early repayment charge that would need to be factored into the amount you’re borrowing.
You also need to get settlement figures for all of the debts that you want to consolidate. They may also have penalties of interest to end those debts. We need that settlement figure to advise you correctly.
Can I include my existing mortgage in the remortgage for debt consolidation?
Rather than remortgage, you could stay with your existing lender and take a further advance to debt consolidate. People often do that.
You can remortgage your existing mortgage plus a separate mortgage for the unsecured debt. Or, you might have £100,000 with a lender, but you’re in the middle of a five-year fixed rate. You then borrow another £30,000 with that lender and have two parts to your mortgage and two sets of terms and conditions but still one mortgage. Different options are available depending on your situation.
Should I seek professional financial advice before remortgaging for debt consolidation?
100%. I don’t think people should do debt consolidation as execution only – that is, just applying to a bank. There are way too many hurdles and pitfalls to get through.
Even the banks direct will have compliance departments that will potentially derail what you’re looking to do, so you need the correct advice. This isn’t a five minute chat with a broker – this is proper, in-depth professional advice making sure that you get the correct outcomes.
A big question is whether you have debt consolidated before. If there’s a pattern of constantly consolidating, that’s also likely to lead to a decline from the broker’s compliance department. It shows a pattern of overspending, where you obviously can’t afford your lifestyle.
If you just keep adding the debt into your property, at some point you will run out of equity or the ability to pay, meaning you lose your home.
What are the potential tax implications of remortgaging for debt consolidation?
The only time there’d be a tax implication is if you were doing this on a Buy to Let mortgage. I’m not a tax advisor, but I can’t think of anything you would need to investigate on the residential side.
Can I access additional credit after remortgaging for debt consolidation?
This is the risk that a lender is concerned about. Let’s say you have a £15,000 limit on your credit card and you’re maxed out on it. Then you borrow an additional £15,000 on your mortgage to pay your credit card off.
You do that, but there’s nothing stopping you spending that £15,000 on your credit card again. This is why some lenders actually put into the mortgage offer that your solicitor needs to pay off the credit card and close the account.
Depending on your credit profile, you can of course apply for additional credit. But the idea of debt consolidation is that you don’t have to do that. You’ve improved your cash flow and now you don’t need to get into debt to fund your lifestyle.
However, statistics show that people who debt consolidate typically have unsecured debts again five years later. It is very much a pattern of behaviour.
How can I ensure a smooth transition when remortgaging for debt consolidation?
Use a professional broker who’s experienced in doing debt consolidating. Get all your documents together early – income, bank statements, settlement statements and credit agreements. Then you don’t need to go hunting for them.
If you go to a bank, for example, to ask for a settlement figure for your loan, it might take a week or two to post it out to you. So get your ducks in a row with regards to paperwork before you start the process – that will make it easier for you.
Are there any alternative options to remortgaging for debt consolidation?
Yes, definitely. If you’ve got credit cards, look at 0% balance transfer options and other lower interest deals. Aim to get off your high interest rate to something lower, to enable you to make progress in paying the debt down.
If you’ve got multiple loans, rather than adding these to your mortgage, you could look at an unsecured loan to consolidate all those. You would only have one payment at potentially a lower interest rate than before.
This is applicable if your credit wasn’t so good when you took out your loan, and a higher interest rate was applied. If your credit has improved you can now apply for something at a lower rate. These options may be more appropriate than adding it to your mortgage.
They’re likely to be shorter term and higher monthly payments – but remember, it’s only your mortgage term that’s making the payment cheaper. Over the life of the mortgage you will pay significantly more in interest than if you paid it off short term.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up with your mortgage repayments.
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 with your mortgage repayments.