This month we’re talking about debt consolidation. Summer’s here and perhaps you’ve put a holiday on a credit card or you have been racking up a bit of debt over time. You might be wondering how you can consolidate it and manage it better.
Remortgaging to manage debt is a topic that divides brokers, so I’ll give you a balanced view.
How does remortgaging for debt consolidation work?
Hopefully you have a considerable difference between the value of your property and your current mortgage balance. Most lenders have apps where you can see what your mortgage balance is, but if not, I’d recommend getting a Checkmyfile report to confirm the balance.
To find out more about Checkmyfile click here
Debt consolidation with a remortgage means adding your debt to your mortgage balance, using some of your equity to pay off your debts. The benefit is potentially lowering your monthly debt repayments to be more manageable. It’s actually life changing for some clients.
You remortgage, increase your mortgage balance and swallow up your debt within your mortgage. That means you’re paying the debt back over a longer period of time, paying less each month and possibly on a lower interest rate.
But on the flip side you’re spreading that debt over a long period of time and you will end up paying more overall. Our job is to look at that over the short term and long term and explain it to you.
Is it a way out of debt?
Lots of my clients have struggled with the guilt and the worry of debt. It is stressful, especially when paying it off feels so out of reach. Often people add more debt to the equation because paying it off seems so far away.
I’m a big believer in the emotional impact of mortgage broking, as well as the logical side. On paper it might not make sense to consolidate your debts into your mortgage, but if the emotional impact of that is huge, that can make it worthwhile.
I personally did some debt consolidation through my mortgage and it was a life changing lesson for me. But not everyone learns that lesson. They put their debt into their mortgage and get back in the same situation two years later.
It should only be used once or twice. Lenders talk to each other – if you’ve already consolidated debts before, they won’t like it. So it should be considered an opportunity to change your spending habits.
What are the pros and cons of remortgaging for debt consolidation?
The big advantage is that you can reset your financial situation and reduce the interest you’re paying. You will just have one monthly payment, which is always helpful.
The main risk is that you go on to get into more debt – and your mortgage is already more expensive. Consolidating again will keep increasing your mortgage balance, which isn’t good. You didn’t buy your home and build that equity to just spend it on credit card debt or loans.
It can also cost you more in the long term. A credit card or a loan does have a higher interest rate than a mortgage, but you could pay it off within three to four years. If you add it onto your mortgage over 25 years, you’ll be paying it back for much longer, costing you more in total.
What will a mortgage broker advise?
We will do all the calculations with you, to show you in real terms the difference between paying your debt back direct or adding it to the mortgage. That will form part of our recommendation to you.
It’s up to us to educate you about why consolidation might not be the best thing to do and explain the other options. But some people, myself included, just want to reset. They don’t want to see the balance each month.
But imagine the debt is a holiday and you’re still paying for that holiday 20 years later. Is it worth it for two weeks in the sun? We’ll talk to you about the debt – what did you buy and why? How were you feeling at the time? How quickly did you accumulate that debt? And how close to your credit card limit did you go? These are all things that show us a pattern, and will help us talk to you about avoiding debt in the future.
We blend the practical things like interest rates and how long the debt will take to repay, and also the emotional benefits of addressing the problem.
Can I remortgage to consolidate debts more than once?
You can, but I wouldn’t recommend it. Technically, we have done it twice for clients. I’ve never done it three times. A lot of brokers will say no because it doesn’t feel right to them.
You can consolidate any type of debt into a remortgage – secured loans, for example, or loans or credit cards, or even energy debt. Affordability is very important. Can you afford a bigger mortgage balance? If so, and there’s enough equity in the property, you can do it.
Is it worth the debt to fund home improvements?
We extended our home by taking a secured loan, and then did a debt consolidation mortgage. We saw this as an investment – we ended up with a better house that was worth more money. I used that money well, so adding it onto my mortgage felt like a natural thing to do – I spent it to improve the value of my home.
When I sell the property, the money I borrowed will become money in my hand. That’s a clever way of using debt consolidation mortgages.
How do I apply for a debt consolidation remortgage?
Talk to a mortgage advisor – we will help you. There’s no need for embarrassment or shame, it’s extremely common for people to get into debt. This is just part of life. Debt consolidation can be a fantastic way of lowering your monthly outgoings and used correctly, with the right broker explaining it and educating you, it can be the best advice.
If you’ve got some debt, you want to have a no judgement conversation, get in touch with one of the team at the Mortgage Mum, and I can assure you that you’ll come away feeling lighter no matter what the outcome.
Next month, we’re going to be talking about remortgaging for home improvements. Join me then and if you have any questions you have in the meantime, do get in touch. Thank you so much for listening.
Think carefully before securing other debts against your home.Your home may be repossessed if you do not keep up with your mortgage repayments.