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Debt consolidation loan vs. remortgage to pay off debts: Which is best?

If you are looking to raise cash to consolidate debt such a loans or credit cards you may have considered a remortgage or a debt consolidation loan.

Remortgages and debt consolidation loans are both secured on your property and in both cases the lender will take a legal ‘charge’ over your home as security. As they have this collateral, lenders will often offer lower rates on debt consolidation loans and remortgages than they do on other sorts of borrowing such as credit cards and unsecured loans.

So, which is the better option – a debt consolidation loan or a remortgage? We look at both your choices.

Pros and cons of a remortgage

A remortgage means that you switch your entire mortgage from one lender to another. As part of this process you can also raise additional funds to repay any debts you may have including overdrafts, credit cards, personal loans or store cards.

If you have a lot of equity in your home and you want to benefit from the same interest rate deal on your entire mortgage, a remortgage may be the best option for you. Some lenders offer excellent interest rates for remortgage clients and you can benefit from a lower rate on your main mortgage as well as on the additional borrowing.

A remortgage will also leave you with one lender and one loan rather than separate creditors and separate loan payments.

However, if you are looking to remortgage you are likely to have to prove your income and that the loan is affordable to you. Lenders may require you to have a high credit score and you may be asked to provide bank statements and proof of income. This may be difficult if you are self employed or your income is irregular.

In addition, a remortgage may be more expensive than a debt consolidation loan. You will often have to pay arrangement fees, valuation charges and legal fees for switching your home loan from one bank or building society to another. A debt consolidation loan will typically have lower costs and lower early repayment charges if you want to repay the loan early.

Pros and cons of a debt consolidation loan

There are several advantages of taking a debt consolidation loan over a remortgage.

Firstly, you may currently have an excellent deal on your main mortgage. You may have a low fixed or discounted rate and you may be tied into this deal for several years. By remortgaging, you would lose this deal and you may have to pay ‘early repayment charges’ to your current mortgage lender. By taking out a debt consolidation loan instead, you can continue to benefit from your existing mortgage deal without paying any penalties.

There may be other reasons why you cannot remortgage. If you are self employed you may not have the proof of income that a lender will need to agree your mortgage. You may earn high levels of commission or bonuses that a lender won’t take into account. Or, you may have a less than perfect credit score which means your application is refused.

Debt consolidation loans are often available to borrowers with previous credit issues, self employed borrowers and applicants whose income is irregular or comes from various difference sources.

Finally, you may choose a debt consolidation loan if you want to borrow a high proportion of the value of your property. Remortgages are often limited to a maximum of 60-70 per cent of the value of your property and so a debt consolidation loan may be more suitable if you wanted to borrow more than this.

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