Using A Remortgage For Debt Consolidation

If you have more than �5000 of existing credit, you may, like many other people in the UK, be thinking of debt consolidation. By putting all of your existing credit together in one place, your finances often become easier to manage, having only one repayment per month. In addition, certain types of credit can carry a comparatively high APR. When consolidated using a form of credit with a lower APR, the interest rate is thereby reduced.

There's no doubt about it, debt consolidation is one of the most popular purposes for a loan these days. Literally thousands of people apply for this type of remortgage every day. There must be a few downsides though?

Applying For A Remortgage

If you are making an application to a lender for a remortgage, your application itself is going to affect your credit rating. Every time you make an application, the chosen lender will need to run a credit search, checking your credit file with one of the major credit search facilities like Experian or Equifax. An increase in activity on your credit file can be detrimental to your credit rating so do your research thoroughly and apply to a lender of broker that is likely to be able to provide you with a suitable deal. Be realistic about your payment history and don't think that it won't be discovered as your credit history file contains a great deal of detail.

Before you apply, check that your current mortgage deal will not penalise you with a redemption penalty. When you remortgage, your old mortgage deal will cease to exist, taking on the new interest rate, term length etc. If you do have a redemption penalty, it may be quite significant running into several thousands of pounds which may mean that you would not wish to go ahead. Research it before you make an application.

Be prepared for a lengthy wait while your remortgage goes through. There is an enormous amount of work that is going to have to be done by your chosen provider and it can often take around 3 months to complete.

Your lender will require an independent valuation of your property to ensure that their investment in you (the money they release to you) is safe. They are normally only prepared to lend what they are certain of getting back if the property is repossessed due to the loan being defaulted. Be realistic about your property's worth when you apply or the independent valuer will only change it anyway which may mean that your application could stall significantly while new paperwork is done.

To support your application, you may probably be asked to supply, proof of ownership of the property, proof of UK citizenship, proof of income etc. These are standard checks run by the lender, so ensure that you have the necessary documents available for inspection.

Once you've decided to go ahead, remortgaging could mean the cheapest APR for you. Mortgage interest rates are often lower than many other forms of credit. Compared with credit cards for instance which typically run at around 15% APR, or store cards which can run at around 29% APR, a mortgage at around 6% may appear a much better bet. There are other variables to consider however when debt consolidation is your aim. If you are regularly paying off your debts and managing them without too much difficulty, you may not think that you need to consolidate. Equally, whilst the APR may be lower with a remortgage, the term over which your credit will now be extended may be significantly longer. This means that you will be paying interest on the credit over a much longer period which may mean that the total amount of interest over the term is actually higher.

Monthly repayments are likely to be lower however and one payment to make can be much easier to handle than when your credit is all over the place.

Remortgages for debt consolidation are likely to remain very popular in the future as people continue to use several forms of credit to finance their lifestyles and later deciding that they need to tidy things up. They won't suit everyone however, so sit down and realistically work out whether your application is likely to be successful and at what rate before you apply.

By: Andy Silk