Remortgaging for Debt Consolidation - Things to consider

An Overview

It may be surprising to you to know that even though you have taken out your mortgage for say a 25-year term, you can in fact regularly change the terms of mortgage every few years. 

Usually, when you get your first mortgage you tend to fix the interest rate for a 2 or 5 year fixed rate. During that time if you were to change your deal you would be charged an ERC (Early Repayment Charge) which tends to be around 2% to 5% of the total loan depending on how many years you fixed for.

But once your fixed period has ended and you end up on your lenders Standard Variable Rate (SVR) then you are free to switch your mortgage over to a new fixed-rate period with your current lender or a with a brand new lender.

If you stick with your current lender they will offer you a Retention Rate which is usually a bit higher than if you moved to a new lender. So it is a good idea to speak to a mortgage broker to see if other lenders can offer a better mortgage rate. 

Another advantage of remortgaging is that you may be able to access some of the increased value or equity that has built up in your home over time. Releasing Equity may increase your monthly payments, so it is important to check that you can afford it first. This is where a mortgage broker can really help as they can calculate the most cost-effective deal available. Saving you from making a mistake that could cost you hundreds if not thousands of pounds over the term of your mortgage.

Debt consolidation

As mortgage interest rates tend to be much lower than consumer credit, like car loans or credit cards, it may save you money in the short term to pay off those loans and instead add that debt to your mortgage. 

But be aware, you will be paying those debts off over possibly 25 years and so the impact of paying that interest for longer could cost you far more in the long run.

It often feels better to have cleared all your car loans and credit card debt off and have it all in one place, in this case in your mortgage.

How do you qualify for a remortgage?

Factors that could influence your qualification for remortgaging include: 

  • Your income; has it increased or decreased since you first took out the mortgage?
  • The amount of equity available in your property.
  • Your credit rating, bad debt or an incorrect address can stop a mortgage going through.
  • The amount you wish to borrow

Remortgage For Debt Consolidation

There is nothing wrong with considering a remortgage debt solution; in many ways, it is an ideal option. However, it is not always the best option, and you should explore alternatives with your mortgage broker first to ensure you are making the right financial decision. 

Consolidating your debts into a revaluation on your house can in some instances, end up costing you more and putting your home at risk – that said, if done correctly it can be a safe and cost-effective solution to debt management.

How To Arrange A Remortgage

Remortgaging your home is generally more straightforward than it was when you first took it out as all the main paperwork and affordability checks have been done. There are no estate agents to deal with or even much paperwork, your broker will handle everything on your behalf.

Key documents needed for a remortgage:

  1. Check out the value of your property on Zoopla
  2. Last 3 months bank statements
  3. If you are employed gather up your last 3 months payslips
  4. If self-employed, your last 2 years accounts (SA302s) 

Working out your LTV (Loan to Value)

First take the current value of your property and then divide that by 100 to get the amount to divide your current mortgage amount by, that will tell you your LTV (Loan to value). 

Example

If your house is worth £200,000 then divide by 100 to get 2,000, then divide your mortgage loan of say £100,000 by 2,000 and you get 50. so your LTV is 50%.

So the lower your LTV the better the interest rate a lender will offer, anything below 60% LTV usually gets the best rates. The maximum LTV is 90% but the interest rate will be much higher than it would be for a 60% LTV. 

Credit Report Health

Make sure that your credit rating is in good shape, any errors like date of birth, current address or even not being on the electoral roll, can trip up a mortgage application and delay it for many weeks.

We recommend CheckMyFile as they are unique in checking all 4 of the main credit agencies, Experian, Equifax, Transunion and Crediva.

Time Scale

If you are remortgaging with the same lender it takes less than a week if it’s just a change of the interest rate. If you are releasing equity, known as a Further Advance, to repay debts, then this will take a little longer at around 2-3 weeks.

Note: If your property is Leasehold (usually true for flats) it will take a longer time, as the solicitor will need to liaise with the freeholder or management company that owns the land.

Mortgage offers should take 2 weeks for a new lender. The legal side of things for a freehold property would be about another 3 weeks.

Usually, within a month of starting the remortgaging process, you can expect the extra funds to be in your bank account and available to pay off your unsecured debts.

Get in touch

If you want to chat through your remortgaging options, then just pick up the phone and call Sussex Mortgages today, and let’s see if we can find you a better deal to suit your lifestyle.