Remortgaging – paying off debts and financing home improvements

The other day I read a report from national money education charity Credit Action revealing that British consumers borrow £360 million every day, most of which is secured borrowing. However, a significant slice of the borrowing cake is unsecured – £36 million per day to be exact. This means that millions of Brits have to find ways of repaying these personal loans and credit cards, sometimes with high amounts of interest.

The total amount of personal debt in the UK now stands at around £1.25 trillion, a huge figure, but one which becomes meaningless when it is seen time and time again. However, this has not stopped journalists and experts from using this particular statistic to predict a doomsday scenario where half the country is bankrupt and out on the street. Although having said that, it is sobering to note that 289 repossessions actions are initiated on a daily basis, according to Credit Action.

So while people in the media see no end to the problem of personal debt on a national scale, it seems that normal individuals are slowly resigning themselves to a future of high debt and high spending. In fact, a recent survey by the Bank of England showed that most debtors could not rule out the prospect of going bankrupt, with some admitting they were considering individual voluntary arrangements or bankruptcy as a way out of the situation.

At the same time, more and more people are being encouraged to improve their homes – such as adding a new bathroom or building an extension – because it is an apparently sure-fire way of adding value to a property. The deluge of DIY programmes that clog up the TV listings every evening, combined with the fact that carrying out home improvements is a much cheaper option than purchasing a new house, means that households are now dreaming up news ways of raising cash. In fact, the British Insurance Brokers' Association has predicted that £57 billion will be spent on home improvements over the next six months or so.

So if homeowners are struggling to pay off debt and finance home improvements at the same time, then it is increasingly likely that they will give serious consideration to remortgaging. In fact, many finance experts believe that the best way to raise money for these purposes is go through an existing mortgage – usually much cheaper than other sources of borrowing when it comes to interest payments, although it does add to the overall mortgage term.

This brings to mind a study by MoneyExpert that found almost a fifth of debt consolidators have remortgaged their home in the last three years in an attempt to get their borrowing under control. Days later, another study, this time by Legal Marketing Services, suggested that British borrowers are releasing equity from their homes through remortgaging in "ever-increasing numbers". The firm said that the total value of remortgaging in the final quarter of 2006 amounted to £9.5 billion, which is quite an impressive figure.

If these findings are to be believed (and there are many others that are in a similar vein) then it must be the case that there are plenty of homeowners out there who are remortgaging for some reason or another. And while I don't doubt that most people have a good reason for releasing cash through their home, it must always been done with a clear head and never out of a sense of panic.

Borrowing against a property increases the risk of repossession, so it's always best to make sure that repayments can be met with some margin of confidence. After all, remortgaging to pay off debts or to pay for a new kitchen will have a long-term impact on a household's finances, so it's best not to rush into anything without seeking advice from a lender, broker or price comparison site.

Author: Richard Mather