Re-mortgaging to pay off crippling loans, overdrafts and credit card debts may seem like a great idea but it’s not always the best way to deal with the problem. Re-mortgaging to pay off debts does have some serious pitfalls.
Let's take a typical example to illustrate the problem.
A homeowner has acquired unsecured debts of £10,000 spread over various credit cards and loans, they decide to investigate 2 options.
Option 1 – Re-mortgage their home for an additional £10,000 at say 3% over a 20 year term which sees their monthly payments rise by £55 per month of which £25 would be additional interest.
£25 / month interest x 12 months / year x 20 years = £6,000 total interest repayable.
Option 2 – They take out a personal loan for £10,000 over 5 years at say 4.5% APR and use the money to consolidate all other debts. The monthly payment on the loan would be roughly £186 per month £131 more than remortgaging, however, the debt would be cleared within 5 years and the total interest repayable would be £1,161.
In total re-mortgaging, your home would cost an additional £4,839 to repay the debt and that’s assuming that 10 years down the line you can get a 3% remortgage deal.
With that being said some people may find themselves in such circumstances that a debt consolidation rem-mortgage is their best option.
Our mortgage brokers are well placed to assess your circumstances and help you decide which option is best for you. Contact us today and we will arrange a fee free consultation.