Remortgaging And Getting Out Of Debt

Rising house prices have meant that many homeowners now have plenty of equity in their homes and one increasingly popular method of dealing with debts is to consolidate them by increasing your current mortgage or by taking out a separate home loan with another lender that is secured against the property.

This is not necessarily a good idea but it can work for some people if it's handled properly. You have to weigh up the pros and cons.

By using your home as security for the loan you will almost certainly be able to borrow the money to pay off your debts as long as you have sufficient equity. And you are also quite likely to get a much more advantageous interest rate than you might have on all your standard credit card debts. If you have half a dozen different debts all with interest rates that are in double-digit numbers, then an interest rate of 5% or less can sound very attractive.

However, and this is probably the most important consideration when borrowing money against your house, you will be putting your home at risk if you can't meet the payments every month. If mortgage interest rates were to go up you might find you can't afford to make your monthly payments and your lender would have the right to re-possess your home.

You should also bear in mind that a loan secured against your home can last as long as your mortgage so you could end up paying much more overall. Your monthly payments may be lower because you've shifted your various debts to just one debt against the house but it's likely to be spread over a much longer term. So, if you ever borrow extra money this way then try and keep the term of the loan as short as possible. If you opt for increasing your current mortgage, for example, then ensure that you can overpay in order to reduce the debt more quickly.

You may find that if you switch your entire mortgage to a different lender that you can borrow more money to pay off your other debts without increasing your monthly payments at all. Most of the best deals on offer are for new customers and, by moving your mortgage to a new lender you will become a new customer.

There are plenty of financially savvy people who do this on a regular basis, even without borrowing more money, just to take advantage of the best rates. But if you do this, there are a number of things you need to consider.

For a start you may have redemption penalties to take into account. These could be sizeable and may well offset the savings you gain by refinancing in the first place. Then there are likely to be legal fees which could cost you roughly £300 and £500. Your new lender will probably also charge an arrangement fee for setting up the mortgage and you can bet your bottom dollar they'll want a survey done on your home too. Arrangement fees can cost around £250 and surveys anything from £200 to £500 for the average house.

Nevertheless, the savings could still be substantial not least because some lenders may offer to pay some or all of these fees as a way of enticing you to switch to them. The larger your current mortgage, the more you are likely to save and these savings could be put towards your debts - perhaps without even having to increase your mortgage.

Alternatively you could phone your current lender and threaten to switch to someone else. If you've had your mortgage with them for a while and are considered a valued customer they may well offer you a better deal just to keep you.

Using your home as collateral for borrowing more money - especially if it is just to consolidate your debts - can be risky. So make sure you've thought it through properly.

Above all, if you use a home loan to pay off your collection of debts, remember you've only converted them all into one large debt and that it still needs to be paid off. And, that, this time, you've borrowed against the roof over your head.