Remortgage to pay off debts - everything you need to know

Loan and credit card bills can spiral out of control

Debt consolidation remortgages are becoming ever more common. Using equity within a property remortgage to pay off debts.

Loans and credit cards can provide much needed financial help at various times of our lives. However, life doesn’t always unfold quite how we planned it to. It is not uncommon for loan, credit card, and other unsecured debt to get out of control. Clearing those debts with a remortgage can provide some much needed financial relief.

Credit cards in particular can end up becoming a thorn in your side if efforts aren’t made to clear the balance. Even with the best intentions, the main problem with credit cards is there is no structured repayment plan in place. This can ultimately mean that credit debts linger for a very long time. Especially if the person with the debt continues to add more debt to the card.

Recent case example - remortgaging to consolidate other outgoings

One of our existing clients had a mortgage review recently. When the time comes to remortgage we will always look at the overall financial situation. Often it will be a pound for pound remortgage. However, this time my clients wanted to take some additional borrowing. They had built up some loans and credit cards over the last 2 years whilst renovating their new home. They now wanted to use some of the newly acquired equity, which they had gained following the home improvements, to pay off the debts.

How does paying off debts with a remortgage work?

Remortgaging a house to pay off other debts, or a debt consolidation remortgage as it is also called. This is a process of increasing the mortgage borrowing when remortgaging to free up funds to then pay off debts. This can be in the form of loans, credit cards, furniture finance, car finance – etc.

Adding unsecured debts of this nature to a mortgage may mean more interest is paid in the long term. This is due to the fact the mortgage term is probably much longer than the term of a personal loan. However, the interest rate would almost always be much higher on a credit card and there is no payment plan that will ensure the debt is cleared in a timely manner.

The immediate financial relief can be so important

The immediate financial relief to the client is often the most important thing. After all, that’s almost always the reason why a client would add loans and credit cards to a mortgage. The monthly outgoings are spiralling out of control. Unless we can reduce the outgoings somehow they could be heading for a complete financial meltdown. That is the last thing anyone wants. Therefore, although adding unsecured debt to a mortgage may mean the debt is taken over a longer period, the short term gain is often most important to avoid financial capitulation.

Also, for mortgage affordability, as well as regular income it is also possible to use child benefit, tax credits, and maintenance payments. These types of additional income can be very important when applying for a remortgage.

The difference in monthly payments can be huge!

The clients in question has spent a substantial amount renovating their new home. Now it was time for the new home to pay them back. Debt consolidation remortgages can provide huge financial relief, as you will see below:

The monthly outgoings on loans, credit cards, and the mortgage had reached £2,793. This was getting too high for them. We looked to remortgage and use some equity to pay off the outstanding unsecured debts. Leaving them with a much more manageable, single monthly payment.

After remortgaging and paying off the unsecured debts, their new mortgage payment is now £1,727 – this reduced their outgoing by £1,066 per month. AND we maintained the same mortgage term of 23 years.

The old mortgage was at £328,000 over 23 years on a fixed rate of 2.24% – £1,517 per month

The new mortgage is now £378,000 over 23 years on a fixed rate of 1.99% – £1,727 per month

Very Happy Clients

We completed this remortgage from start to finish in under 4 weeks. Which in itself is a great achievement. Needless to say the clients are over the moon. After using a mortgage to consolidate debts, their monthly outgoings are much more manageable which ultimately means they are now much happier.