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How to remortgage to pay off debt

Thursday, 26 January 2012 2:02 PM

Keeping on top of multiple debts every month isn't always easy - particularly if you have a mortgage and other bills to pay.

If you're repaying several debts every month, as well as making your mortgage repayments, you could simplify your finances and save money by taking out a debt consolidation mortgage.

Basically, this is a home loan big enough to cover your original mortgage and all your other debts that you may have outstanding on things such as overdrafts, credit cards and personal loans, etc. Although you'd be borrowing more overall, by consolidating your debts you'd only have one debt to repay every month - and you could pay less each month, too.

Let's look at an example to show you exactly how a debt consolidation mortgage could work.

If you have a home worth £100,000, and £25,000 of equity in your home (i.e. your deposit), you'd need to take out a mortgage worth £75,000 to pay for the house itself. However, if you're also looking to borrow a bit extra to pay off your other debts - say £5,000 - this amount would effectively be deducted from your deposit. This would leave you with £20,000 worth of equity, while also increasing the size of the remortgage to £80,000.

Taking out a debt consolidation mortgage could lower the overall cost of your monthly repayments, for two possible reasons. Firstly, remortgaging your home with a consolidation mortgage could come with a lower interest rate than you would find on your unsecured debts, which would reduce the amount of interest paid each month.

Secondly, a typical remortgage is repaid over a 25-year period, so including your unsecured debts in a debt consolidation mortgage effectively divides your debts by the number of months in your mortgage (in this case, 25 x 12 months = 300 payments). This could significantly reduce the size of each monthly payment.

However, there are some downsides to a debt consolidation mortgage that you should take into account. It could end up being more expensive overall, as your monthly repayments accrue interest for much longer.

Furthermore, taking out any loan that is secured against your home is always a risk. If, for any reason, you can't keep up with your monthly repayments, you could be putting your home at risk of repossession - so a debt consolidation mortgage is only appropriate if you're confident that you can commit to regular repayments.

And remember that the best remortgage deals are generally only available to homeowners with a reasonable deposit. Because paying off existing debts reduces your deposit, you may have to accept a slightly higher interest rate on your new mortgage.

Finally, remortgaging to pay off other debts is generally only a suitable course of action if you're already managing those debts well. If you're having difficulty keeping on top of your monthly repayments now, consolidating them into a mortgage is unlikely to help. Instead, anyone in that position should speak to a professional debt management adviser as quickly as possible.

You can find more information on remortgages and debt consolidation on the Think Money website.

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