Remortgaging to consolidate debt in Derby - is it right for you?

Debt consolidation remortgages are one of the most common enquiries we receive from Derby and Derbyshire homeowners. The idea is straightforward. You remortgage your home for a larger amount than your existing mortgage, using the additional funds to pay off credit cards, personal loans, car finance or store cards. You replace multiple monthly payments at high interest rates with a single, lower monthly mortgage payment.

It sounds simple, but there are genuine risks that every Derby homeowner needs to understand before making this decision. This guide gives you the full, honest picture.

How does a debt consolidation remortgage work?

Say you have a mortgage of GBP140,000 on a Derby property worth GBP240,000. You also have GBP25,000 of unsecured debt, a combination of credit cards, a personal loan and car finance, costing around GBP600 per month at interest rates of between 18 and 29 per cent.

A debt consolidation remortgage would involve increasing your mortgage to GBP165,000, using the additional GBP25,000 to clear all the unsecured debts. Your new mortgage payment might increase by GBP120 to GBP150 per month, but your overall monthly outgoings could fall by GBP400 to GBP500 per month because you are no longer paying the high-interest unsecured debt.

The immediate cash-flow benefit can be significant for many Derby families. But there are important caveats.

The honest pros and cons

The total cost question

While your monthly payment goes down, the total amount you pay over the life of the mortgage may be higher because you are spreading the debt over a much longer period.

GBP25,000 of credit card debt at 20 per cent over three years costs around GBP9,000 in interest. The same GBP25,000 added to a mortgage at 4.5 per cent over 20 years costs around GBP13,500 in interest. More in total, despite the far lower rate.

This does not mean consolidation is the wrong decision. For many Derby homeowners the immediate cash-flow relief is worth more than the long-term interest saving. But you need to go into it with your eyes open. Our advisers will always calculate both figures for you before making any recommendation.

When is debt consolidation the right choice?

• Your monthly outgoings are causing real financial hardship
• The interest rates on your unsecured debts are much higher than available mortgage rates
• You have enough equity in your Derby property to cover the additional borrowing
• Your income is stable enough to comfortably afford the increased mortgage
• You have addressed or are addressing the habits that led to the debt
• You have considered and ruled out other options such as balance transfer cards

When might it not be the right choice?

• Your mortgage is approaching the end of its term
• There is a large early repayment charge on your current mortgage
• The unsecured debts are small and could be cleared within a few years through budgeting
• Your income is likely to change significantly in the near future

Are there alternatives to consider first?

• 0 per cent balance transfer credit cards. If your credit score is good, transferring credit card balances to a 0 per cent card gives you an interest-free window to pay down debt without securing it against your home.
• Personal debt consolidation loan. An unsecured loan at a lower rate than your existing debts may be available without putting your home at risk.
• Free debt advice. Organisations like StepChange or Citizens Advice can provide free, impartial advice on managing debt without remortgaging.

Call us on 01332 300300 or complete our enquiry form. Select Pay Off Debt as your reason for remortgaging and one of our specialists will be in touch within one working hour.