Can I Remortgage to Pay off Debt?

People find themselves in debt for all sorts of reasons. If you are in debt and you’re worried about your financial future, it is important to consider all the options. It is also important to look at ways of tackling your debt as soon as you can. The longer you leave it, the larger your debt is likely to get. If you are a homeowner, you may be able to consider remortgaging your property to free up some cash. Many people see this as an easy route out of their problems. However, the picture is not quite as clear as that. Your mortgage is the largest loan you will ever have. In that context, borrowing more against your property might seem to be an attractive option. However, is it the most sensible decision? We’re going to look at the main questions you are likely to have if you are thinking of switching home loans to pay off debt. The most important thing to be aware of here is that it may not be the best solution. It is one of many that could help you work out the best route forward. Always remember it is wise to get professional advice before making a decision that could affect your future. It depends. A lender will look at your financial history when considering whether to grant the loan you are applying for. If you hold any credit card debt, this will be indicated in your credit history. Any late payments will be noted, as will the amount of credit card debt you currently hold and how close to your credit limits you are. However, many people do successfully apply for a new home loan even though they have credit card debt to their names. There are other factors that are taken into consideration as well, so the amount of debt you have isn’t the deciding element. For instance, someone with credit card debt of £25,000 who has an income of £30,000 would have a high debt-to-income ratio. Conversely, someone with credit card debt of £30,000 who earns £150,000 a year would have a lower debt-to-income ratio. That holds true even though the second person has a higher amount of debt to their name. It is this ratio that is most important to a potential lender. They will look at your ability to pay your bills each month. If the figures suggest you are struggling, you are very unlikely to be able to switch to a different home advance. Failed credit applications are also problematic. These will show up on your credit report. If you have applied for multiple credit card deals to try and switch products to manage your debt and been denied, a lender may look on these unfavourably. In short, then, your personal financial situation will be paramount in deciding whether you can get another mortgage with credit card debt outstanding. Crunch some numbers and use an online calculator designed for such circumstances before applying for anything. Every adult has a credit score. This reflects the way you handle money, pay off debts, and meet your financial obligations. A lender will access your score as part of the process of assessing whether to agree to a new home loan. There are bad credit mortgages out there, but as you might imagine, they generally come with a higher interest rate. This is because the lender is taking a greater risk in agreeing to lend to someone whose credit score is not as good as it could be. Sometimes, they may reject such an applicant since lending to them does not present a safe risk. It’s frustrating to be in a scenario where you are paying a higher interest rate on your home loan than you’re seeing advertised on the high street. However, remember those rates may not apply in your situation. If you do have bad credit, chances are you would not qualify for those favourable rates. So, while you could remortgage if your credit is not as good as it could be, it may not always be the best decision. If your credit rating has suffered a few knocks since getting your existing mortgage, you would probably end up with a higher rate rather than the lower one you would ideally like. Let’s suppose you have decided to free up some equity from your home to pay off some debts. You’ve considered alternative options and decided this is the best way forward for you. You will likely want to get the new loan in place as quickly as possible, so you can access the cash you are looking for. The fastest completion you can hope for is around four weeks. It is not unusual for a straightforward remortgaging process to take twice that long. If everything runs smoothly, you can expect your new deal to be in place within that time frame. There are two main factors that might hold things up. The first is switching from your existing lender to a new one. The second is any situation where there are hiccups involving your application. For example, it may be declined, or further checks might be needed before a new loan can be agreed. Always make sure you can keep up with payments on your debts while you are waiting for a new home loan product to be agreed. This will depend on your loan-to-value ratio. In terms of switching loans, this LTV ratio comprises two elements. The first is the size of your existing loan. The second is the current value of your home. The bigger the difference between the two, the more you could potentially borrow. This is called the equity in your home. You cannot borrow more than the equity held in your property. Ideally, you should only borrow what you need to. It is very tempting to borrow more, but this will raise your monthly repayments and leave less equity in your home. It may even mean you will be paying it off for longer. You should also consider the numbers before deciding to go down this route. Accessing your property’s equity may seem the obvious solution when you have debts you need to pay off. However, even though the interest rate will be far lower on a home loan than it would be for the average credit card balance, you’re paying it off for far longer. That means you’re going to pay more in interest over the life of the loan. For some, drawing on the equity in their home may be the only available solution. However, you can see how important it is to consider your options prior to going down this route. A secured or unsecured loan may prove the better path. You might also be able to switch deals to another credit card that gives you 0% interest on transferred balances for a year or two. You will need to plan to clear your debt (or at least reduce it) in that time, but it could save you £££s if you do so. No two situations are identical. It’s vital to go through your finances to work out how much debt you have. It’s easy to think the solution lies in accessing as much equity as you can from your property. However, remember that whatever you access will drive up the balance on your loan. This in turn increases your monthly payments and reduces the amount of equity left in your home. In a sense, taking this route can be akin to kicking the ball down the road to deal with later. It doesn’t solve your debt problems – it merely transfers the debt from one product to another. For some, it may also be too tempting to get into further debt in the way they originally did, i.e. via store or credit cards. Settling your debts is important for your own financial wellbeing, peace of mind, and credit score. Take control of the situation by assessing your options and considering all the potential solutions and loans you might be able to use. If you find yourself in this situation, don’t panic. Consider why you have been declined for remortgaging. It may be because your credit history has thrown up some red flags. Have you applied for several loans recently? Are you missing payments on your credit card debts or other debts? If so, the lender you approached may consider you to be too high a risk for remortgaging at present. If you haven’t already requested a copy of your credit history, do so now. It will highlight any potential issues you can then set about solving. You cannot improve your credit history overnight, but you can use it to help you take steps in the right direction. For some, staying with their existing home loan and finding another solution for reducing their debt payments is the better way to go. Getting independent financial advice can also make things clearer to understand.