Before diving in and explaining how you can go about reducing your monthly outgoings, you need to know exactly what is happening with a remortgage before agreeing to anything.
Remortgaging to pay off bad debt may seem like a superb idea to you while you’re facing high premiums on credit card debt, paying off a new car (that felt like a good idea at the time), and perhaps even still paying that holiday from a few years back that you haven’t yet got around to paying for.
Spending on luxuries happen, but it’s not just luxuries that bring people to amuse the option of remortgaging because debt doesn’t start out bad. It starts off manageable, then it mounts up to an unmanageable level, straining your household finances, spiking your blood pressure with worry to the extent that you’d do almost anything to feel like you have a handle on things once again.
One of our points of pride is in the fact we’ve helped people save very significant amounts of money in interest or have been able to reduce people’s monthly outgoings – often drastically. As you read on, you’ll discover the tremendous impact of debt consolidation to the most affordable and manageable level available. This really does change the lives of those who have got into increased levels of debt and are struggling to keep up.
To really get a handle on bad debt, especially when you’re considering remortgaging, you ought to be super knowledgeable about this capital raising option and that’s what we’re going to help you do…
How Remortgaging works
This is a short-term solution to a long-term problem. You’re effectively taking one debt that’s at a higher interest rate and shifting it onto a lower interest-bearing loan, using time as the driving factor to lower your monthly outgoings.
The key phrase there is “lower your monthly outgoings”. Remortgaging to pay off your debts is what you want to be doing but don’t think of it as that. When you remortgage, you’re moving your high-interest loans to a lower interest-bearing loan.
The mortgage is, always has been and always will be the cheapest way to borrow. It’s why remortgaging is so attractive, even to those who don’t need to pay off bad debt and instead want to tap into a lump of cash to spend on luxuries.
That luxury cash release comes from the form of equity, so let’s talk about equity…
What you need to know about your home equity!
You know that saying “the value may increase or decrease” that’s often used on insurance products? It’s applicable to your home too. The value of your home may go up as well as down. Ideally, you want the value of your home to increase while the payments you make to your mortgage decrease the lenders ownership of your property.
Problem is – that doesn’t always happen.
Understanding Home Equity
Home equity is: The current market value of your home less the total amount you’ve paid towards your current mortgage.
Negative equity is: When the current market value of your property exceeds the total amount you’ve borrowed against it. So if you mortgaged at £100,000 and your properties market valuation is less than that, you have negative equity. This is not good. Think of it this way…
If you were to sell up your house today, get the full market value price for it, would it be enough to pay the money that’s secured against it?
If the 2008 financial crisis taught us anything, it’s that we cannot rely on the housing market for price growth. Always remember your property valuation can decrease as well as increase. In the past, people have been known to remortgage to pay off bad debt, relying on the home’s value to increase and that’s not happened, which as a result placed them in negative equity because they’ve borrowed more than their home is worth.
Positive Equity is: Where you want to be, so consider this as your long-term financial goal. Positive equity is when you own more than you owe. If you still have £80,000 outstanding on your current mortgage, with a home valuation of £100,000, you’d have £20,000 positive equity.
Understanding Loan-to-Value (LTV) for Remortgaging and how that Relates to Equity
The Loan-to-Value ratio is used by lenders and expressed as a percentage. Your mortgage is the loan and the value of your property is reflected by – the value. The LTV is a ratio used to determine how much you can borrow. When you first take out a mortgage, your LTV will be low, Mid-Range or High and this is where your credit score comes into play.
Low LTVs deliver the biggest savings and are typically only available to those with extremely good credit scores because those are low risk to lenders, therefore they offer the cheapest interest rates.
Low LTVs are considered to be under 70%.
At the Mid-Range level, rates are competitive so the repayments are manageable. LTV ratios in the Mid-Range are up to 80% LTV.
The highest LTV is 90% currently, meaning you cannot borrow the entire market value of your home which includes your existing mortgage when you’re remortgaging.
Therefore; if your property was worth £100k the total maximum borrowing including your existing mortgage, would be £90k. If your current mortgage is £85k, then the most you could consolidate in the current market would be £5k. If your house was worth £200k and your current mortgage was £110k, then you could borrow up to £180k, so a further £70k would be available.
As an illustrative example, check out this table bearing in mind that remortgaging is only available when you have enough home equity available…
NOTE: These figures are all approximate. An illustration showing exact figures specific to you will be given in the research & application stage of your enquiry, through an official Key Facts Illustration.
When we’re referring to savings, we’re discussing savings to monthly outgoings. As discussed earlier, this isn’t paying off bad debts entirely. It’s a form of consolidation, which is essentially taking your high (or higher) interest loans, consolidating them all and putting them onto the lowest loan possible, which is always a mortgage. It’ll stretch your payment terms, which is why it’s extremely effective at lowering your monthly costs, but it does have the potential of you possibly paying more in the long-term because the payment periods are extended.
To be noted in the example given above is that we’ve used an indicative savings percentage of 4%. Remortgaging rates are variable because they’re dependent on the amount of equity you have in your property and the LTV rate available. It is possible to get a much lower rate than the illustrative 4%.
For a better idea of how your rates would affect your monthly savings, see this repayments table for more details.
It’s also possible for you to change the repayment terms to suit your budget or the speed in which you repay the mortgage.
The table below shows you examples of how the payment periods affect your monthly outgoings:
As you can see from the above, you can pay more in the short-term or less in the long-term, allowing you tailor your remortgage terms to suit what you can afford each month.
The real question though is…
Do you qualify for a debt consolidation remortgage?
To use a remortgage to consolidate your debts, you will have to go through an application process. With a remortgage, you need a lender that allows capital raising so you can pay off debts and at an LTV you’re looking for. That’s the tricky part because naturally, you’ll want a good LTV ratio as that’s how you know you’re getting a good deal.
Different lenders have varying opinions on risk level and the reasons they’ll provide the remortgage for. Most lenders will offer remortgaging, but they calculate the risk into the LTV they offer. For most debt consolidation remortgages, the standard LTV is 80%. Specialist lenders though will go to a maximum of 90%.
In addition to the reasons given in your application for a remortgage, which can be many, you’ll also be subject to a credit assessment. This is standard for any financial product which includes a search on your credit history and your current credit score, which is then used as an indication of the level of risk you pose.
It is possible to get a remortgage to pay off existing debts with an adverse credit history. Just expect to pay extra due to the perceived increase in the level of risk to the lender.
Each lender is going to have different criteria they use to assess credit scores. Some of the strictest have a policy where they only accept a clean credit history, with others being more relaxed.
Also considered as part of the application process is affordability. You must be able to prove you’ll be able to afford the monthly repayments. Lenders mostly check this by lending you 4x your annual household income, with specialist providers raising that to 5x.
Ask your adviser to calculate this for you and put you with the lender best suited to you, and with the best rates.
What other debt consolidation options are there?
A remortgage will almost always be the cheapest option, but if for some reason it’s not possible or your circumstances mean leaving your current mortgage as it is would be the best option (for instance if you have an amazing rate), then you could consolidate the debt on a secured loan, or even on an unsecured loan.
Be warned though…
Secured loan rates tend to be much higher than mortgage rates, being anywhere from 7% – 30%+ depending on your credit score, but you can still take them over as long a term possible and in theory, borrow as much as you like (within limits of LTV and affordability).
Unsecured loan rates can be as high if not higher than secured, from 6% up to sometimes over 50%, but you are usually limited to a maximum term of 7 years and maximum borrowing of £25k – this means if you are consolidating a large amount of debt then the repayments are likely to be much higher than for a longer term on a secured loan or mortgage.