If you’re thinking about consolidating your unsecured debts by remortgaging, there are a few things to consider, especially since the market crash in recent years. But it can still be a good idea so long as you think things through and know what you’re getting into.
The attractive low rates (and even though they are set to go up, they will remain below three per cent for a long time to come) are a big incentive factor for many considering remortgaging. Those credit card debts, running away at 18 per cent, hire purchase agreements that have proven to be more costly than originally thought, all these debts could potentially become more manageable with a remortgage and consolidation. However, as Mervyn King put it bluntly last year ‘The nice decade is over’. The era of easy credit, for many, is a thing of the past.
Firstly, how much equity do you actually have in your home? Is there a sufficient amount to accommodate a sizeable consolidation of debt? Remember, you will be repaying the loan back for a lot longer and the bank or building society will ultimately capitalize out of your need to borrow.
It is wise to work out what it would cost you to repay your debts as it stands and what it would cost after remortgaging. Only by comparing the total costs involved can you establish whether a debt consolidation remortgage is the right thing for you.
Once you have determined that a remortgage may be the right thing, you will find it tougher to agree the mortgage that you need than you may have in recent years. Since the ‘credit crunch’, banks have been forced to lend more responsibly, meaning that they take fewer risks than before. Agreeing a mortgage is therefore nowhere near as easy as it was a few years ago.
Lenders are allowing far less loans onto their books these days to avoid a repeat of the last couple of years, so you may find it more difficult to get additional funds against your property, and if you do it is likely to be less than you could have obtained two years ago.
If you have a good credit record, can easily afford the repayments and have lots of equity in your home, you have the best chance of being agreed for a debt consolidation remortgage. The greater the proportion of your property value that you borrow; the greater the risk to the lender and the less likely the loan is to be agreed. Lenders are also less likely to consider future earning potential, as bullish views on future wealth were one of the factors that caused lending problems over the last few years.
Since the financial crash, homeowners do not have so much faith in the market and are no longer under the impression that property is a fail safe investment – you should take this on board too. Beware that property, like other investments, can fall as well as increase in value so just keep this in mind for the future.
Encountering problems making credit card repayments can be dealt with by changing your minimum payments or negotiating with your card provider. Struggling to meet mortgage payments is a completely different kettle of fish and can result in much more serious repercussions.
Whilst interest rates are low, remortgaging to consolidate debts is an attractive proposition. It can also make a great deal of financial sense and help your household budget immeasurably. However, consolidating loans means that you are securing previously unsecured debt. Any failure to pay will therefore place your home at risk. Always weigh up the risks and benefits carefully before making any decision.
Howard writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.