If you have debt that you’re struggling to manage, remortgaging your house could be an option for you. Remortgaging to pay off debt might be a way to manage your finances, but it’s not the right choice for everyone. In this article, we’ll explore how remortgaging to pay off debt works, when it might be a good idea, and when it could be a bad choice. We’ll also look at things you need to consider before remortgaging, how much you can borrow, and other options for managing debt.
How can you remortgage a house to pay off debts?
Remortgaging to pay off debt means taking out a new mortgage to pay off your existing mortgage and any other debts you may have. This can include credit card bills, loans, or personal debts. You do this by borrowing more money than you owe on your current mortgage and using the extra money to pay off the debt.
This option is sometimes called ‘debt consolidation’ because you combine all your debts into one, which makes it easier to manage. You’ll have one monthly payment instead of several, which can make things simpler.
However, it’s important to remember that by remortgaging, you’re securing your debt against your home. This means that if you miss payments, your home could be at risk. So, before deciding, make sure you’re confident you can afford the new payments.
When remortgaging with additional borrowing might be a good idea
Remortgaging to pay off debt might be a good idea if you have a large amount of unsecured debt and are struggling with high-interest rates, like those from credit cards. Here are some reasons remortgaging might work for you:
- Lower interest rates: Mortgage rates are typically lower than credit card rates, so you could save money in interest over time.
- Consolidation of debt: Having one loan to pay off instead of multiple debts can make it easier to manage your finances.
- Longer repayment period: When you remortgage, you often have the option of spreading the payments over a longer period, which can reduce your monthly payments and make them more affordable.
- Improved cash flow: If your monthly payments for your other debts are too high, remortgaging can lower your payments and improve your monthly cash flow.
When is remortgaging to pay off debt a bad idea?
While remortgaging can work well for some people, it might not be the right choice for you. Here are a few situations when it may not be a good idea:
- Higher monthly payments: If your new mortgage payments are higher than your current mortgage, this could put extra strain on your finances. Make sure the new payments are affordable.
- Long-term debt: If you extend the length of your mortgage to pay off debt, you might end up paying more in interest over the long term, even if your monthly payments are lower.
- Risk to your home: Since you’re using your home as collateral, if you fail to make payments, you could risk losing your home. This is a serious consideration and should not be taken lightly.
- Already in debt trouble: If you’re already struggling with debt and find it hard to make monthly payments, remortgaging might not solve the problem. You might want to seek other advice or help from a financial advisor.
Things to consider before taking out a remortgage to clear debt
Before you decide to remortgage to pay off debt, there are a few things to think about:
- How much you can borrow: Lenders will look at your income, existing debt, and the value of your home to decide how much you can borrow. The more equity you have in your home, the more you may be able to borrow.
- Interest rates: Compare the interest rates of remortgaging with your existing mortgage. Even if the interest rate is lower than your credit card rates, make sure it’s competitive enough to save you money.
- Your current mortgage: Check if there are any early repayment charges on your current mortgage. This could add to the cost of remortgaging.
- Your financial situation: Make sure that you can comfortably afford the monthly payments, both for your mortgage and any new borrowing. If you’re unsure, it’s worth talking to a financial advisor.
- Debt-free goal: Remember, the goal is to become debt-free. Avoid using the extra funds for new spending on credit cards or store cards which can lead to more debt in the future.
How much can you borrow when remortgaging?
When you remortgage to pay off debt, the amount you can borrow depends on a few things:
- The equity in your home: This is the difference between the value of your home and what you owe on your mortgage. If your home has increased in value, you may be able to borrow more.
- Your income: Lenders will look at your income to see if you can afford the new payments, including the new borrowing.
- The value of your home: Your lender will also look at the value of your home compared to the loan. The higher the value of your property, the more you may be able to borrow.
- Your credit score: If your credit score is good, you’ll have a better chance of getting a good deal and borrowing more.
Alternatives to remortgaging to pay off debt
Remortgaging isn’t the only way to pay off debt. Here are some alternatives to consider:
- Debt consolidation loan: This is an unsecured loan that combines all your debts into one. While the interest rates may be higher than a mortgage, they are often lower than credit card rates.
- Personal loan: A personal loan might be a good option if you don’t have a lot of equity in your home or don’t want to risk your home. Personal loans typically come with fixed interest rates and fixed monthly payments.
- Balance transfer credit cards: If you have credit card debt, a balance transfer card could help. These cards often offer low or 0% interest for a certain period, allowing you to pay off your debt more quickly.
- Home equity loan: Similar to a second charge mortgage, a home equity loan allows you to borrow money against your home’s equity but typically comes with higher interest rates than remortgaging.
Conclusion
Remortgaging to pay off debt can be a good solution for some people, but it’s not the right choice for everyone. It offers a way to consolidate debt and potentially lower your interest rates, but it also comes with risks. Before deciding to remortgage, carefully consider your options, your ability to make the payments, and whether you’re comfortable using your home as security.
If you’re unsure whether remortgaging is the right option for you, speak to a broker who can help guide you through the process and find the best option for your financial situation. To learn more about remortgaging and how it can help with debt, visit our remortgage page.
If you need help understanding debt consolidation or how to pay off debt, check out our debt consolidation page for more information. You can also explore our remortgaging for debt consolidation blog to see if that might be the right choice for you.