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Remortgage Debts

If you own your house, and its value is higher than your mortgage, you have 'equity'. That equity is one possible solution to debt problems because re-mortgaging your house can release money to pay off other debts. Secured lending of this kind may be suitable if you can't get unsecured lending, if you owe more than £25,000 or when an unsecured loan would be too expensive.

Re-mortgaging is similar to taking out a consolidation loan: all debts are brought together and total monthly payments should fall, although they will usually be over a longer period.

Releasing equity

If your house is worth more than you paid for it, releasing the equity is possible by borrowing more on your existing mortgage; by moving to a new and larger mortgage; or by taking out a second loan that is secured against the house.

No lender will usually allow you to release the full value of your equity, in case the property decreases in value. Around 10% to 25% will have to remain, so you can borrow up to 75-90% of the value of a property. This percentage is known as the Loan To Value ratio or LTV.

Remortgage

Additional borrowing from an existing mortgage lender is the most straightforward kind to arrange because they will understand the circumstances and they will often want to be flexible to keep a customer. You may still need to have the property valued and to have a credit check. You'll need to agree the new lending with anyone responsible for the mortgage jointly with you. If the lender agrees, a lump sum will be paid into your account and your monthly mortgage payments will go up.

You may also want to search around for a better deal from other lenders and ClearStart is able to recommend possible re-mortgage brokers to help with this.

Remortgage example figures

As an example the following person increases their mortgage from £100,000 to £120,000 to pay off £20,000 in credit card debts and personal loans.

	Previous figures	New mortgage
Property value	£150,000	£150,000
Mortgage balance	£100,000	£120,000
Equity remaining	£50,000	£30,000
Lump sum released	£0	£20,000
Monthly mortgage payments	£600	£720

This person has released £20,000 but mortgage payments have increased from £600 per month to £720 per month.

Secured loans

A second loan secured against your house usually involves higher interest rates and a shorter loan period than re-mortgaging. The higher costs are due to greater risks for the lender – a secured loan is known as a 'second charge' because the mortgage is the 'first charge'. That means the mortgage company has first rights to any money when a property is sold, re-mortgaged or repossessed. If you already have a second charge loan, some loan companies will lend a 'third charge', at an even higher interest rate.

Advantages of re-mortgaging	Disadvantages
Lower, affordable monthly payments A single payment, not several Creditors are paid off in full It stops payment chasing or legal action Credit rating is not impaired	Availability depends on status Maximum loan is up to £25,000 Interest costs are still significant Spending may continue on other credit cards etc.

What to look out for

You should always think carefully before securing existing debts against your home because it may be repossessed if you do not keep up repayments on your mortgage. With an unsecured debt, your home is at less risk. Make sure monthly payments are affordable and avoid continuing to build up other debts – some organisations suggest cutting up your credit cards.

ClearStart maintains a panel of preferred mortgage brokers who specialise in debt consolidation and who can help when making a decision about re-mortgaging.

Further reading:
Debt | Debt Advice | Financial Advice | Compare Debt Solutions | Store Card Debt | Credit Card Debt | Loan Debt | Remortgage Debt | Debt After Death | Late Payments | Budget Check

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