Is remortgaging the best way to consolidate your debts?

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If you're looking to consolidate your debt then adding it to your existing mortgage is one option.

According to recent research by uSwitch.com, over a third of homeowners (37%) who have remortgaged in the last five years have done so to consolidate existing debts.

Why consider doing it?

Mortgage rates are almost always considerably lower than those for credit cards and personal loans because they're secured by a property.

Two fifths (40%) of those in the uSwitch survey chose to add their debts to their mortgage because they wanted to spread their loan over a longer period and nearly two thirds (60%) believe that this is the cheapest way to borrow.

It's important to remember that because repayments are spread over a longer period even low interest rates can add up

Here's an example;

If you add a debt of £4,000 to your mortgage and you're paying a typical mortgage rate of 4% for a mortgage period of, say, 20 years then you'll pay £4,000 more in interest.

On the other hand, even at a standard credit card rate of 18%, you'll pay just over £2,700 in interest over three years. So, it's important to take into account the overall cost of the loan, not just the interest rate.

One way of handling this is to increase your mortgage payments as you'll reduce the interest you pay and you'll be free of your mortgage debt sooner. It's important that larger repayment amounts are affordable for you. It's also important to remember that not all lenders allow you to make over payments, make sure you ask your lender about overpayments first – most will allow it up to a certain amount.

However, at certain times in your life or under particular circumstances adding your debt to your mortgage can help you manage your money. In some cases, you'll simply be able to ask your lender if you can borrow more on your existing mortgage. The other option is to remortgage and find a new deal.

The most important factor to consider is the amount of money you're borrowing in relation to the current value of your property

This is known as the loan to value (LTV) and the lower your mortgage is as a proportion of your current property's valuation the more likely you are to be able to increase your borrowing.

A lower LTV will also generally secure you a better mortgage rate. For debt consolidation on a mortgage most lenders look for a LTV of about 70 per cent or less.

It's worth talking to a mortgage broker who can offer guidance and look at a variety of different lenders to find the best deal for you. If you go for a new mortgage you'll have to pay a fee – typically around £1,000 but this is often included in the amount that you're borrowing.

Remember that whether you're increasing your existing mortgage or applying for a new one you'll have to prove to the lender that you can afford a bigger mortgage and, more importantly, that you're sure of this yourself.

Having enough in savings to cover two or three monthly mortgage payments just in case something happens to you is always a good idea. Don't forget that if you can't meet your mortgage commitments your home is at risk.

Adding debt to your mortgage is an option if your mortgage is relatively small in comparison to the value of your house and if your monthly repayments are easily manageable. However, paying off your loans is the safest bet.


What now?

  • Work out how much more you'd like to borrow in order to consolidate your debt.

  • Contact your lender to see if you can increase your mortgage by this amount.

  • If they agree to lend you more ask about any costs involved. This might include mortgage arrangement, legal and surveyors' fees.

  • If you're not tied into your current mortgage take the opportunity to look around for a better deal with a lower rate. A broker or online comparison site will help here.

  • Before you go ahead and increase your borrowing, take some time to calculate whether you can really afford the higher mortgage payments. Bear in mind that interest rates might rise.


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