Updated: April 14, 2023
Remortgaging To Pay Off Debts
Thinking about remortgaging to pay off your debts? It can be done! Find out the different ways to do it and what you need in our in-depth guide.
Author: Pete Mugleston - Mortgage Expert, MD
Updated: February 16, 2022
Remortgaging to consolidate all of your debts into one monthly repayment can significantly reduce your overall outgoings and give you greater control over your finances.
In this article we’ll look at all the advantages of managing your finances this way, what the process involves and where to look for any guidance you might need.
The following topics are covered below...
Can you remortgage to pay off debt?
Yes. Although it’s better described as ‘consolidating’ debt. Effectively, you’re transferring other debts to your mortgage balance, usually to benefit from cheaper rates or make them more manageable.
In addition to a mortgage, most homeowners have additional debt by way of:
- Credit cards
- Car finance
- Store cards
- Secured loans
You will need to have sufficient equity in your property to allow further borrowing and demonstrate that you are eligible for a bigger loan. If you satisfy those requirements you can transfer your debts to a more affordable deal that benefits from lower interest rates and longer repayment terms.
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Ways to remortgage and pay off debts
There’s basically two ways you can do this, which are:
- Remortgage to a cheaper deal: This will reduce your mortgage repayment and free up more of your monthly income to increase payments on other debts, allowing you to clear these balances sooner.
- Remortgage and release equity: This will allow you to take a lump sum to pay off other debts in one go. In many cases your mortgage payment will go up, but your overall monthly outgoings will be reduced.
How to do this: step-by-step guide
If you’re interested in remortgaging in order to pay off your other short-term debt, there’s a few simple steps you can take to make the process much more straightforward:
There are several steps to take before making a decision:
Step 1: Calculate your total debt and equity
Contact each of your lenders and ask for a settlement figure in writing. It should include any fees or charges for settling early and will have an expiry date. Make sure you get one for your mortgage as well
To find a guide price for your property, check sale prices for similar properties that have recently been sold in your area. This is completely free and can be done using the government website or by contacting a local estate agent.
To calculate your equity, deduct the amount of all outstanding debts secured against it from its value.
Let’s imagine your home is worth £250,000. Your outstanding mortgage debt is £135,000 and you have a secured loan of £15,000 totalling £150,000.
You own £100,000 of the property outright which equates to equity of 40%. You can only borrow more money against the proportion of the property that you own.
Step 2: Work out how much you need to borrow
The amount you need to borrow will be determined by a number of factors:
- Any outstanding secured and unsecured debt
- Remortgaging costs such as legal fees and new valuation fees
- Early settlement charges
If you can clear some debt or cover fees from your savings, that may be your best option. But if you don’t have savings or would rather keep them for emergencies without borrowing short-term again, then remortgaging could be the best option for you.
Remortgage To Pay Off Debt Calculator
Our remortgage calculator can tell you what your new loan-to-value (LTV) ratio and repayments will be after you've remortgaged, with sufficient equity released to pay off your outstanding debt..
After you have remortgaged, your new LTV ratio will be and your new mortgage payments will be as indicated below…
New Monthly Repayments:
Get started with an expert broker to find out how much they can help you save on your remortgage.
Step 3: Speak to a broker
Borrowing more to pay off debts is a big decision and should never be taken lightly. But in many cases, it is your best option.
A mortgage broker will talk you through your choices and help you come to a balanced decision to minimise both your immediate outgoings and the long-term costs of borrowing.
The brokers we work with will know which lenders are most likely to approve your application so your chances of being accepted are vastly improved than if you go it alone. If you’re already beginning to feel debt getting on top of you, this can be vital as rejected applications will harm your credit rating and make future applications less likely to be approved.
If you get in touch we can arrange for a remortgage specialist to contact you directly.
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When you apply to remortgage for the specific purpose to pay off debt, all lenders will need to satisfy themselves that they are helping you and not making your debt problems worse.
To do this, they will pay particular attention to how you’ve managed your finances up to now.
This is a key factor when remortgaging to consolidate debt. It provides a snapshot of your credit history. Arrears (even arrears on your mortgage), defaults and CCJs will not necessarily prevent you from being approved for a remortgage but will limit your options and mean you pay higher rates.
Some lenders will calculate all or some of your existing debt repayments into your monthly expenses in case you rack up debt again.
Others will want to pay your creditors directly instead of transferring the money to your account.
If you are currently in an IVA, restrictions will be placed on your property while it is in place. If you want to remortgage or sell the property you will need permission from the supervisor.
Other eligibility requirements
In addition to making sure your credit rating is in good shape, you’ll need to satisfy the other eligibility requirements of the new lender.
- Loan to value (LTV) ratio: The lower your LTV, the more chance you have of being approved for the loan and the better the rate you will be offered. Most lenders cap LTV at 90% and you will need to consider the entire amount you wish to borrow, including any fees, not just the sum of your mortgage balance and outstanding debt.
- Age: Many lenders are uncomfortable lending to older borrowers and will limit borrowing amounts or terms for over 55s.
- Affordability: Lenders are duty bound to make sure you can afford the repayments. Often, the best rates are reserved for those with a regular income and minimal outgoings. As a general guide, you can borrow around 4.5 times your salary. Different lenders have different ways of calculating income. If you’re self-employed or want bonuses, overtime or benefits taken into consideration, a broker can help identify lenders who will look more favourably on your application.
- Debt-to-income ratio: This is your monthly outgoings compared with your monthly income. For example, if you earn £2500 per month and your outgoings are £1000 per month, your income to debt ratio is 40%. Lenders use this to help calculate your ability to keep up repayments. Try our debt-to-income calculator below to work out what yours is.
Debt to Income Ratio Calculator
You can use our debt-to-income (DTI) ratio calculator to work out how much of your income is going towards your fixed outgoings, expressed as a percentage. Based on that percentage, this tool will tell you whether mortgage lenders will class your DTI as low, medium or high.
Your Debt to Income Ratio is %
Good news! Most mortgage lenders will class your debt-to-income ratio as low. You’re unlikely to be declined for a mortgage based on your outgoings, but speaking to a mortgage broker before applying is still recommended as they can improve your chances of getting the best deal.
Most mortgage lenders will class your debt-to-income ratio as moderate, which means some of them might view your application with caution. Some lenders are much more strict than others when it comes to affordability and debt, so it’s important for you to find a lender who’s more lenient. You should speak to a mortgage broker before you apply to ensure you’re matched with a lender whose criteria you fit.
Most mortgage lenders will class your debt-to-income ratio as high. But that’s where we can help! With so much of your monthly income going towards debt repayments, you could struggle to get approved for a mortgage without the help of a mortgage broker. We can help you find a lender who’s more lenient on debt and affordability, and could still secure a mortgage approval.
The benefits of remortgaging to pay off your debts
Credit cards and store cards are one of the most expensive ways to borrow. If you only pay the minimum amount your debt continues to grow.
Spiralling debt can be hugely stressful. Remortgaging to get a grip of it may seem like the obvious answer. But it comes with risks and you should speak to a mortgage advisor if this is something you’re considering.
Before making a decision on whether it’s right for you, consider these aspects:
- Take advantage of the best rates available to you
- Reduce your monthly outgoings
- Reduce stress
- Gain control of your finances and improve your future credit rating
- Fixed rate options
- Your home is at risk
- May cost you more overall
- You may have to pay early settlement fees
- It can backfire if your new monthly payments don’t reduce by enough and you need to borrow again
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Alternative ways to clear debt
Before committing to remortgaging to clear debts, it’s worth considering other options, such as:
- Unsecured loan: With a good credit rating and affordability you can borrow up to £25,000 with an unsecured personal loan. Rates are higher than borrowing against your property, but your home is not at risk. The maximum term is usually 7 years.
- Secured loan: A secured loan or second charge allows you to borrow more against your property without remortgaging. Rates are higher than a standard mortgage, but you can often borrow more than the lump sum you would receive through a remortgage. If you move home while the secured loan is still active, you will usually need to pay it off.
- Balance transfer credit card: Transferring to a lower rate or 0% credit card can reduce your monthly outgoings but if you don’t use that extra money to pay off the debt you will eventually end up in the same position. This requires financial discipline.
Get matched with an expert mortgage broker today
If your existing fixed term is coming to an end, now is the time to look at your remortgage options. If your level of debt is starting to mount and cause you concern, it’s best to act fast to ensure you have the maximum number of options on the table.
We work with mortgage brokers who have access to high street lenders and specialist mortgage providers. They can help advise you on the best course of action for now and to protect your financial future.
Call today on 0808 189 0463 or enquire online to arrange a no-obligation chat.
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It’s unlikely but not impossible. But there are other options and, depending on eligibility, you may be able to take out a second mortgage on repayment terms without settling the interest-only element of borrowing.
Most remortgages take between six – eight weeks to complete but it can be sooner. If you have a lot of debt or if your accounts are in arrears it may take longer to gather all the information together and for a lender to reach a decision.
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Mortgage Expert, MD
About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!