You may have seen adverts on your social media pages lately from companies advertising ways you can reduce your outgoings and save money each month by consolidating all your other debts into your mortgage. But what does this mean, and how does it work?
What does consolidating all your debts mean?
Well, simply put, consolidating your debts means you take out one loan and use it to repay all your other smaller loans, giving you a single, lower monthly repayment.
With house prices having risen a lot in the last few years, many people are finding that when they remortgage, they can afford to borrow more money from their mortgage lender and use this to repay the credit cards or loans they have outstanding. But is this the right solution for you, and will it save you money?
What is remortgaging?
Remortgaging is when you move your current mortgage (the loan you took out to buy your house) from one lender, to another one – usually to reduce what you’re paying by taking advantage of an attractive new deal, or to release some additional funds for home improvements or to consolidate other, more expensive debts.
How does remortgaging work?
The process of remortgage is simple. A qualified adviser will look at your current situation (which may be different to when you first took out your mortgage), talk to you about why you want to remortgage and explain to you the benefits of doing so, and then apply for the new mortgage for you. It’s often a lot quicker than when you bought your house. The new lender will look at your income and expenditure to be sure you can afford the mortgage, but once a new mortgage offer as been made to you, a solicitor (usually paid for by the new lender) will pay off your old mortgage for you, and your new payment starts with your new lender the next month. With technology and online services now, this is all done very quickly and easily.
How much does remortgaging cost?
This can depend on what you’re trying to do. If your current lender is offering you a great deal to stay, then potentially it won’t cost anything at all. If you need to move to a new lender to take advantage of their lower interest rates, there may be a product fee and a mortgage advice fee. However your adviser, whomever that is, will always set these out before you remortgage, and you’ll never pay anything unless the remortgage process goes ahead. A good mortgage adviser will be able to save you money, even if fees apply.
Can I remortgage with credit card debt?
No. A credit card cannot be secured against your house in the way a mortgage is.
Do’s and dont’s or remortgaging your property
Do – check if there’s a penalty to leave your current mortgage first
Do – speak to a qualified adviser. There may be other options available to you rather than just speaking to your bank that could save you thousands
Do – keep an eye on what the mortgage industry is doing. It’s the biggest loan you’ll ever take out, so paying attention will pay dividends in the future.
Don’t – miss a payment on a mortgage. Your home will be at risk if you do, and moving to a lender with a good interest rate could become difficult.
Don’t – go on a comparison website and just apply online for the cheapest deal. Less than 2% of mortgages applied for through comparison sites will complete as you can’t check if the loan is suitable for you.
Don’t – ignore your mortgage when your current deal ends. You could end up paying far more in interest if you don’t remortgage.
5 pros of remortgaging
- Reduce monthly payment
- Release funds for car, house, holidays, home improvements, university fees etc. The list is endless
- Take advantage of exclusive deals offered by other lenders
- Consolidate debts into much lower monthly payments
- Change your mortgage to suit your new circumstances or even pay it off quicker
5 cons of remortgaging
- It will take some effort on your behalf. A good adviser will carry the load, but it will require some of your attention and time
- Occasionally, there are some fees that may make you feel it’s not worth it
- If your circumstances have changes for the worse, you may not qualify for as good as deal as you’re currently on
- Your house may have gone down in value, leaving you unable to remortgage.
- If you’re borrowing more money, you may have to extend your mortgage term for longer than you originally planned to make it more affordable.
What can I use my remortgage for?
You can raise money when remortgaging (providing there’s enough value in the house) for pretty much any legal purpose other than gambling funds, paying tax bills, or propping up a failing business. We’ve had clients clear expensive loans and credit card debts, have significant home improvements and extensions done, helped their own children buy a house, raise a deposit to buy rental properties, go oh holiday, and even buy dream cars. If you can think of it, chances are we can fund it.
Can remortgaging save money?
Typically, when you take out a mortgage you’ll agree to pay a certain interest rate for a given period of time. This can be fixed at a certain amount, or vary depending on what suited you at the time. It’s common that these initial “deals” will last between 2 and 5 years. That means that after 2 years, your introductory “deal” ends and your interest rate will likely go up to a higher rate that the lender want’s to charge. By moving to a new lender you can take advantage of a new introductory “deal” and save money by paying less interest.
What are risks and Costs of remortgaging?
It’s important to understand the risks and costs. There are two main areas on this we want to highlight to you.
The first is the risk. A mortgage is a loan which is secured against your house, meaning that if you don’t keep up on the repayments, the bank or lender can potentially take your home back. If you borrow from someone on an “unsecured” basis and you don’t keep up on repayments you may face consequences such as local court action or a negative credit score, but it’s unlikely you will lose your home.
The second is the cost. Whilst consolidating debts from, let’s say a credit card that is charging you 18.9% per year, it may appear to be really appealing to reduce that rate to 1.8% for example. However, if you were planning on clearing that credit card in the next 12 months, adding the debt to your mortgage and repaying it over 25 years would ultimately be a lot more expensive.
Having made you aware of the risks though, there are some great advantages. Most people will save money by doing this. And this is purely down to the rate of interest charged.
Let’s use a real-world example.
You have a credit card with a balance of £10,000 and you make the minimum monthly payments of £257 (1% of the balance plus 1 months interest). It will take you 4 years and 10 months to repay the credit card, and cost £4,843 in interest alone. So you’ll spend £10,000 but pay back almost £15,000.
Let’s look at adding that to your mortgage. If you owed £150,000 on your mortgage already, paying a rate of 1.80% and had 20 years remaining, the total amount you would repay would be £178,620.
If you borrowed an additional £10,000 and cleared your credit card, the total amount you would repay over the 20 years would be £190,528. Setting aside the £10,000 you used to clear the credit card, the additional interest paid on the mortgage, compared to the credit card will be £1,908. This is saving you almost £3,000 in interest, even though you’re paying the debt off over a longer time.
Additionally, if we use this example, you would be paying the mortgage at £744 per month, plus the credit card at £257 per month. Consolidating your debt would give you a single monthly payment of £793, saving you £208 per month.
And there you have it – this is how consolidating your other debts into your mortgage works. It could save you thousands.
We always recommend speaking to a qualified adviser before securing debts against your home as it may not always be suitable. And as always… here’s the legal bit.
Your home may be at risk if you do not keep up repayments on loans secured against it.