Anyone struggling financially will know what a desperate situation debt can leave us in. Many will turn to remortgaging their home – but is this really the answer?  We talk you through the process step by step and show you how to get the best deal.

• Talk to independent brokers London and Country who will search the whole of the market and bring you the best deals.
• See our step by to guide to remortgaging.
• Sign up for our free debt action plan emails for a 12 week programme showing you the best ways to clear your debt simply and quickly.

What is it?

Remortgaging is the process of moving your mortgage from one lender to another. Typical reasons to remortgage are:

• You want a cheaper mortgage
• You’ve come to the end of one deal and you have to get another one
• You want to release equity (increase the size of the loan on your house) to spend on other things
• You want to add some unsecured debts (loans, credit cards, overdraft etc) to your mortgage and pay them off that way.

However with the recession still biting and the property market still struggling, anyone considering remortgaging should think carefully before making a decision. Remortgaging may not even be a viable option for you.

Some people may find that after falling property prices they don’t have enough equity in their home to remortgage. Banks and building societies have seriously tightened their lending criteria and although some high loan-to-value (LTV) deals are coming back into the market, most people will still need big deposits (or considerable equity in their homes) before even being considered for a remortgage application.

Only those who can put down a large amount will have access to the best deals.

Is it a good idea?

Remortgaging to pay off debts is a bit like getting your stomach stapled instead of dieting to lose weight. It seems like a quick fix but if you carry on spending like you did before, you’ll just have a worse problem later on.

The way it works with a lot of people is:

1. They see the price of their debts (the interest rates they’re paying) versus the nice low rate they’re paying on their mortgage and think that it makes sense to put all the other debts onto the mortgage.
2. They renegotiate a higher mortgage, adding in the other borrowing. This looks good until they have to pay afee to arrange a different mortgage.
3. But, once the debts have been moved over they feel much happier and suddenly realise they have empty credit cards with no debt on them.
4. They start spending with these credit cards…because they can.
5. Their next mortgage payment is higher so they have less money to spend during the month…they use the old credit cards even more.
6. Suddenly, they have a bigger mortgage payment each month and a load of new debt on the old credit cards, leaving them in a worse state than before!

This is why remortgaging is not the right solution for everyone as a way out of other debts.

There is no definitive answer as to whether you should remortgage but you do need to do the sums and really be honest with yourself. You will also need to remember that whilst switching may help your financial situation now, it could work out to be more expensive in the long run as any money you add to your mortgage will weigh down your monthly payments and increase the length of its life.

If you add your unsecured debt (credit card debt, overdraft etc) to your mortgage, not only will you have to pay more each month but if you suddenly can’t pay you the bank could close your mortgage and take your house. Remember, the last thing you want to do is lose your home and by converting unsecured debts to secured ones by adding to your mortgage, you could be doing exactly that.

Although credit card companies can be nasty and threatening, they can’t take your home – whereas mortgage lenders can!

However, if it genuinely helps you reduce debt and you won’t be tempted to go and spend again it can be a good option. Also, you may be able to get your current mortgage company to add your debt on to your existing mortgage and reduce the interest rate for a very small fee.

Right now  mortgage rates are historically very low, so you could remortgage, add on your unsecured debt and still be paying less per month than you were before. Speak to our mortgage brokers, London & Country, to find the cheapest deal on the market right now.

There are some golden rules to take heed of before remortgaging to clear debt. Firstly, close down all your other credit cards, loans and overdrafts etc so you won’t use them and create more debt problems. Secondly, make sure you have really got a handle on that spending habit. Finally, ensure that you are remortgaging to get a better deal than you are paying now

Dos and don’ts of remortgaging

DO:

• Work out the figures and make sure the total cost of entering a new, or renegotiated, mortgage is cheaper than your existing one.
• Cast your net wide for different types of mortgage products to compare. Check our comparison service first.
• Make sure you’re given the total cost of coming out of a mortgage and going into another, including the application, surveying costs and legal costs.
• Compare like with like, for example repayment and interest-only deals. If you have 15 years to pay off on your current mortgage, you should be looking at new 15-year deals.

DON’T:

• Remortgage to wipe unsecured debt such as credit cards and overdrafts if you can possibly help it.
• Use remortgaging as a way to line your pocket.
• Get a new 25-year mortgage if you only have 15 years left on your old mortgage. Keep the same term for repayment. The aim is to pay off the same amount faster.
• Just take whatever your current mortgage provider offers without looking at other offers.
• Just believe what a mortgage broker tells you, particularly if they are tied to a bank or estate agency. They will try to sell you an expensive mortgage that gives them a good kickback.

Step one: Check your current deal

Get re-acquainted with your current mortgage, including the amount you pay each month, the interest rate and the remaining sum you have left to pay. You can get these figures from your annual statement or contact your mortgage provider to get them in writing.

Consider why you chose this mortgage originally. Have your circumstances changed at all? Could you afford a better deal?

Step two: Calculate any fees you may incur

Firstly, check for any early redemption charge (ERC) for leaving your current deal early.

Early redemption penalties can be considerable and may wipe out any savings made by moving to a new deal. Fixed rate mortgages will almost always have these penalties so do check.

There will also be an exit fee for closing the mortgage so contact your lender to see how much this will cost.

What questions should you ask?

• How much will I have to pay each month?
• How much will I have to pay for the whole of the mortgage?
• What are the costs (legal, surveyor, mortgage arrangement etc)?
• Are there any exit fees if I pay it off early?
• Is it better/cheaper than my current mortgage?
• Is the saving enough to make it worth switching?

To get the real answers to these questions it may be better to go with a independent broker who can compare all mortgage lender deals. Our mortgage brokers London & Country will be able to give you the hard facts and get you the best deal for your situation.

Step three: Look around for the best deal

Track down the right deal for you. Like diets, there are a lot of remortgage options to choose from. The trick is to look past the latest fads and get something that lets you pay off your debt quickly and cheaply.

When it comes to comparing deals it’s all quite simple in theory – you just need to need compare monthly payments over mortgages of the same life (length). Do not forget to subtract any one-off or ongoing fees including the administration, arrangement, legal and valuation fees.

Sort out three to five options that will let you pay off your mortgage as fast as possible, with manageable monthly payments. No mortgage should squeeze you dry, so leave some leeway for things out of your control, like rising interest rates, illness, loss of job etc.

For a list of remortgage options many companies will give you speedy quotes. Ask for a breakdown of any costs to remortgage and, in case you would like to switch again, fees for moving on.

It’s a good idea to use a mortgage broker who can scan the market for you and help you make the right decision. Independent mortgage broker London and Country has this remortgaging calculator to help you decide whether remortgaging is for you. You can also talk to them for free and get some helpful advice.

Don’t forget we’ve put together a quick and fun guide to getting a mortgage to give you an idea of what you should be doing now in order to get the best price possible and minimise your ‘mortgage shock’. Download it now and send it to your friends – it’s completely free!

Step four: Do your sums

We’ve been going on and on about the fees but what exactly are you looking at? Well, when remortgaging to a new deal there will be several fees to take into account;

• Arrangement fees which could be as much as £500-£1,500
• Valuation fees are typically £200-£300
• Solicitor fees (to handle paperwork) are between £300-£350 or could be over £1,000 if they’re doing the searches as well.

Some lenders waive the fees so it’s worth looking around for deals with no arrangement fees and a free valuation for example. Some even offer cashback to cover legal costs (although that’s rare now). Do be careful though, as deals with fees waived are likely to make their money elsewhere – with a higher rate of interest.

Once you have calculated how much switching to a new deal will cost you – you’ll be in a better position to make the right decision.

To boost the amount of money you can borrow on your mortgage it’s a good idea to check your credit history and make sure there are no errors which could impede your chances of getting a good deal. If your credit record is poor check out our helpful guide to cleaning up your record.

Step five: Talk to your lender

Have a chat with your current lender to see if they can match the new deal you’ve found. If they can – it’s worth sticking with them to avoid the fees mentioned above.

Useful Contacts

• London and Country
• Download a FREE Moneymagpie mortgage guide
• Moneymagpie debt action plan
• National Debtline
• Citizens Advice Bureau