Remortgaging used to be a fast and effective way of saving thousands of pounds off the cost of a mortgage. It also provided an easy and affordable way to consolidate any outstanding debts.
Before the credit crunch, it was common for borrowers on higher mortgage rates to remortgage. Shaving just 1% off the interest charged for a £100,000 mortgage could save around £80 a month.
But now that interest rates are at record lows, many have found themselves better off on their lender's own standard variable rate (SVR).
Coupled with generally restrictive lending criteria for the most attractive deals, remortgage activity has waned.
Falling house prices and reduced levels of equity mean remortgaging to clear debt is no longer an option for many people.
The decision to try and remortgage to consolidate debts will depend on a number of factors, such as the existing standard variable rate, overall level of debt and the new rate of interest that will be applied over the total amount of the loan.
In some instances, providing the debt is manageable, transferring it to a credit card could be a cheaper option in the short term.
Take for example, someone with debts of £20,000 to clear.
They already have a £100,000 mortgage loan and are on an SVR of 2.5%, paying £2,500 in interest each year.
If they transferred the debt onto a credit card with an interest rate of 20% they would pay £4,000 a year in interest. In total, they would be paying £6,500 a year in interest alone.
If they remortgaged to cover the £20,000 at 6%, the total interest over the year would be £7,200, making them £700 worse off.
But remortgaging your debts away can still save you money.
Borrowers with more equity in their property are likely to find better remortgage rates available. Someone who needs to borrow less than 75% of the value of their property might be able to find a better deal than in the above example. If they could remortgage the £20,000 debt at 4.5%, they would pay £5,400 a year in interest, saving £1,100 a year overall.
On this basis they might be able to remortgage the £20,000 at 4.5%, meaning they would pay £5,400 a year in interest and saving £1,100 on the above example.
Unfortunately anyone looking at over 75% LTV is going to struggle to find a competitive deal to make it worthwhile.
It's also worth remembering that remortgaging debt will mean paying it off over a longer period of time, effectively moving it from unsecured debt to secured debt. That may not be in a borrower's best interests.
Remortgaging to a different lender can incur extra costs, such as an application fee, legal fees and the like. When you add up all the individual costs involved you may find that any saving you may have made has already been wiped out.
The decision to remortgage to consolidate debts will depend on each individual's circumstances. Speak to an independent financial adviser for a thorough assessment of the situation.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Our trained expert advisers have access to the UK’s leading lenders and using their knowledge and skills will place you with the most suitable leader and product for your needs.