Paying off expensive debts with a consolidation remortgage can seem like the proverbial no-brainer. With a much lower interest rate to pay, and your monthly outgoings slashed, it can provide the breathing space you need to get your finances back on track.
Nevertheless, there are potential drawbacks to paying off unsecured debts with a mortgage (a secured debt) which mean it's not the straightforward choice it might seem at first glance.
The focus of this guide is to help you make an educated decision before you take the plunge.
Read on to learn about the pros and cons and how self-employed applicants are assessed for a debt consolidation remortgage.
- What is a debt consolidation remortgage?
- What are the benefits of debt consolidation?
- Are there any disadvantages?
- Can I get a consolidate debt if I'm self-employed?
- How much extra can I borrow?
- What types of debt can I consolidate?
- Am I eligible for a self-employed debt consolidation remortgage?
- Get a debt consolidation remortgage quote
What is a debt consolidation remortgage?
A debt consolidation remortgage is a new, replacement mortgage where you borrow additional funds to clear your credit card, loan and other debts. It's sometimes referred to as a debt consolidation mortgage.
To consolidate debt, you must have sufficient equity in your home or property. For example, if value of your home is £400,000 and your existing mortgage is £100,000, your equity in the property is 75 per cent.
What are the benefits of debt consolidation?
The primary benefit of remortgaging to consolidate debts is that it can cut your monthly outgoings significantly, often by hundreds of pounds a month.
Pay off high APR debts
For example, interest payments for credit and store cards are typically around 20% APR. Yet you might only pay 5-6% interest by consolidating them onto a fixed rate remortgage.
Debt consolidation can really help if you have a large amount of expensive credit card debt that you're only paying off slowly.
In fact, as a form of revolving credit, credit and store cards are particularly pernicious if you only pay the minimum amount each month.
Beyond any 0% period, interest is added to your balance daily. This means you end up paying interest on the interest, or what's more commonly referred to as compound interest.
According to the March 2022 Money Statistics report, it takes 25 years to pay off a credit card on the average interest rate if you only pay the legal minimum repayment each month.
Apart from reducing your overall monthly outgoings, refinancing your debts through consolidation means you only have the monthly mortgage payment to make. With no other creditors to worry about, it can make life far less stressful.
Are there any disadvantages?
Yes. First, because payments are spread over the lifetime of the mortgage, there's a good chance you'll pay more in interest overall.
With that said, many mortgage products allow overpayments of up to 10% of the mortgage balance per year, without incurring any early repayment charge.
In fact, 20 percent is possible now with a couple of lenders.
Making overpayments to reduce interest
Overpayments are applied to the mortgage balance, not the interest, This can drastically reduce the total amount of interest paid over the lifetime of the loan, potentially saving you thousands of pounds.
Securing unsecured debts
Second, unlike credit cards or personal loans, a mortgage is a secured debt, with the property used as collateral.
This means you could have your home repossessed if you run into financial difficulties and are unable to keep up with the mortgage payments.
For that reason, you should think carefully before consolidating debt against your home. Particularly, if you tend to rely on credit cards for lifestyle financing and are likely to rack up more debt in the future.
Alternatives to a debt consolidation mortgage
So if you're not convinced that getting a remortgage to consolidate your debts is right for you, what are the alternatives?
Here's a few to consider:
- Transferring card debts to a zero per cent balance transfer card
- Consolidating into an unsecured personal loan.
- Reducing discretionary expenditure to help you repay debts
- Seeking free debt advice from a charity or non-profit organisation like Stepchange.org