Debt consolidation remortgage | should I remortgage to pay off my debts?
Debt consolidation remortgage: to consolidate, or not to consolidate, that is the question
Should I consider a debt consolidation remortgage? With Christmas right around the corner, it seems extremely timely to broach this question. When you need to remortgage, should you consolidate your debts onto your mortgage?
In order to answer this question, we need to look it from the two key aspects,
1) The Ethical and 2) The Technical.
As ever, lets tackle the ethical aspect first.
Ethics of debt consolidation remortgage
When you remortgage, you certainly do have the option to consolidate your unsecured debts onto your new debt consolidation remortgage.
So off the bat, we want to make it clear – we are not against this as a rule. We are by no means judgemental. You may have had a ‘life event’, carried out some home improvements on credit cards/loans, or are struggling with childcare costs or school fees. As I often say ‘life gets in the way of your plans’. However, serious consideration needs to be given before deciding this is the best option for you. Here are some key thoughts.
Reducing your outgoings via debt consolidation remortgage
- This is often the key driver for a debt consolidation remortgage. If you have a couple of large credit cards and a personal loan, those things combined could well be more than your mortgage payment. So when you remortgage next, surely it makes sense to roll it all into one lower monthly payment?
- Well, the true answer is Yes and No. Obviously, it reduces your outgoings, but it may not reduce the cost. Let me explain.
- For argument and simplicity sake, lets say you have a £10,000 credit card you want to pay off on your mortgage.
- Crudely, a new mortgage rate will be sub 2%. So that interest rate charged on £10,000 over 30 years = more pounds than paying off the same £10,000 as a credit card debt at 18% over 24 months (£6,000 for the former, £3,600 for the latter if you were interested).
- So do you need to consider a very unsexy concept “short term pain for long term gain?”
- Again, no moral judgement on our part, we just do the numbers. It is our role to give you the information so you can make an informed decision. So the question really is – do you want to pay more now, or pay later? That is the correct way to view this dynamic in my opinion.
Reducing your equity as a result of debt consolidation remortgage
- It won’t be lost on you that if you stick to that same example above of a debt consolidation remortgage, you have then lost £10,000 (or whatever value of debt you consolidate onto your remortgage) of your hard earned equity in the property. That is the main consideration in whether to consolidate debt onto your mortgage or not. You have to do what is right for you and if it is part of a larger play, then all cool. Do you have a bonus coming? Are you certain your outgoings will increase? Will your childcare/education costs decrease in the near future? If so, then this can simply be good planning as you can get back ahead of the curve in the near future.
- One of our core values as a firm is getting our clients debt free as soon as possible. Hence our highlighting the pitfalls of a debt consolidation remortgage in this way. While we will support you in this process, it can become addictive, so view it as a one time thing.
- Keeping consolidating debts each time you remortgage will erode your equity. It could even delay your retirement plans. You may have to keep working to clear the debt, or you may even have to sell your property to buy a smaller/lower value one when you come to retire. That may well be your plan as it for many Londoners (myself included). So again, all cool if part of the larger picture, but it should not be a default setting. Hoping for a cold snap with elderly relatives is never sound financial planning…
Technical aspects of debt consolidation remortgage
If after asking yourself the above questions you decide that yes, I do want to consolidate my debts when I remortgage, now is the time to engage with our advisers. They can walk you through the technical aspects of this. Aside from the obvious advice of what product to take and how to fit to your budget, there are also additional considerations when going down this path, which I will briefly outline here.
Value of Debt Consolidation:
- Some lenders do have complex rules around this, for example Santander will only allow a maximum of £50,000. Which may sound a lot, but if you have just funded major works to your home, or have a few children at a good school, that isn’t such a big figure.
- Smaller building societies have smaller maximum values and other lenders no restrictions at all. The point is – the amount you are looking to consolidate may have an impact on the lender you use and the rate you get. This is all visible on your credit file, so there is no escaping it
Loan To Value (LTV)
- I try to avoid technical terms but there is no escaping this one. Lenders determine risk (as in the risk of them not making their money back if you stop paying your mortgage) on the % of the property that you borrow.
- For example, all lenders consider lending a 75% of your property value, or less, as low risk as house prices have never gone down more than 25% in any cycle. Therefore it doesn’t take a genius to work out that many lenders place this 75% LTV restriction when coming to Debt Consolidation. Again, some lenders have stricter rules, others have none. This is exactly when you need to speak to an independent adviser who can find you the most appropriate lender and product.
- This one can get very complex, so in an effort to keep it simple – all lending is underpinned by affordability rules.
- Lenders will determine what you can borrow and how much they will lend you, this ranges from 4 x your income to 6 x your income (both single and joint incomes). That said, if you have debts outstanding, these are deducted before this assessment is made. Some lenders even ignore the debts to be consolidated creating an affordability Catch 22. Again, this is very lender specific and very technical, and why professional advice is required.
Best Outcome for you
- As a firm that has your needs at the core of what we do, we do a calculation internally, that we need to evidence, that helps determine if it is the best course of action to consolidate debts or not.
- We will share this with you as it is key to the advice we give. We have a table that plugs in all the metrics of the debts you have, the rate charged, the new loan, rate charged, total interest paid etc etc, and it spits out a result. Is this is a good thing to do or not? It tends to be quite self fulfilling, as, if you have gone through the steps above, you are probably at this point and it is often the best thing to do.
- However, if it is not, we will look at helping you by way of getting 0% credit cards or maybe restructuring your debt in other way. Again, this comes back to our core value of getting you debt free as soon as we can. Like all medicines, you may not like the taste, but it is often best for the patient in the long run.
As you can see, this is by no means a simple thing and runs up against ethical and technical issues.
As I have mentioned a number of times, please do get professional advice. If you agree with our core value of getting you debt free as soon as possible, then we will be the right company to work with. If not, there is plenty of choice in the market for you. However, often through this exact process we can add the most value.
If you would like to learn more, please contact one of our advisers here today.
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