When and When Not To Refinance Existing Debt

Melinda (Milli) Haine Melinda (Milli) Haine | Loan Underwriter

The Money Advice Service says that 75% of recent first-time homebuyers have stretched their budgets too far by purchasing homes they could not afford. Furthermore, some 80% of prospective homebuyers are willing to overspend to get the property they want. Is it any wonder that household budgets in the UK are maxed out?

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Housing is the most expensive part of any household budget for obvious reasons. However, many homeowners also find themselves paying off other debts that can add up to quite a bit of money every month. A choice to refinance that debt through a secured loan is one way to bring monthly expenses down without defaulting. Here's how it works:

With every monthly payment a homeowner makes on his or her mortgage, the outstanding balance owed is reduced. The difference between that balance and what the property is worth on the retail market is called 'equity'. The great thing about equity is that homeowners can borrow against it with a secured loan. For example, £50,000 equity in your home would allow you to borrow £37,500 with a secured loan offering a 75% loan-to-value (LTV) ratio. You can use that money to pay off your other debts.

Knowing when to refinance existing debt is key to making the system work for you. A good refinancing choice can make a real difference in how you manage your monthly finances. A bad choice can be equally detrimental. Secured Loan Expert wants help you make good choices for refinancing. Here are four signs that suggest refinancing your existing debt is a good idea:

1. You Have Excessive High Interest Debts

Borrowing money in any form comes at a cost. In addition to fees and charges assessed by the lender, you also pay monthly interest charges for the life of the loan. Interest is essentially a fee you pay for the privilege of borrowing. It is also the principal means by which the lender makes money. Unfortunately, some forms of credit have very high interest rates attached to them. If you have an excessive amount of high interest debt, you should consider refinancing with a secured loan.

The definition of high interest debt is relative. Nevertheless, for the purposes of this discussion, any debt with a higher interest rate than the average secured loan is a candidate for refinancing. Here are just a few examples:

  • Credit Cards – Credit cards are notorious for charging high interest rates. In the UK, it is not unusual to find cards with rates ranging between 12% and 21% depending on individual credit rating. Credit cards balances definitely qualify as high interest debt.
  • Unsecured Personal Loans – As with credit cards, unsecured personal loans can carry higher interest rates than their secured loan counterparts. Rates of 7% or higher make these loans good candidates for refinancing.

The more high interest debt you have, the more money you are paying in interest every month. It makes sense to refinance if a secured loan gives you a lower interest rate. By combining all of your high interest debts into a single loan, you will be spending less money every month and less over the entire term of borrowing. The only caveat here is one of loan terms. If you take 30 years to pay off high interest debts that you normally would have satisfied in 10 years, you may actually end up spending more.

2. You Need a Substantial Amount of Money

It is possible to refinance existing debt by acquiring a credit card with a 0% interest introductory offer. Nonetheless, this type of refinancing comes with two inherent flaws. First, the introductory offer is just that. Once it is over, you will begin paying the absurdly high interest rate credit cards are known for. Second, it is difficult to borrow large sums of money in the UK on a credit card.

Let us say your existing debt is in the range of £25,000 or more. A secured loan allows you to borrow that much as long as you have the equity to back it up. You would need five or more credit cards to get that same amount of money. In short, refinancing with a secured loan is a good idea if you need a large amount of money that can only be secured by way of collateral.

Along those same lines, a secured loan is a great way to borrow a significant amount of money even if you are not refinancing existing debt. You might need to help a child pay for university expenses, for example. Being able to borrow tens of thousands of pounds for up to 30 years makes that possible.

3. You're Having Trouble Managing Monthly Payments

We think it is safe to say that budgeting is a lost art these days. People just do not know how to manage monthly payments in a way that keeps everything affordable and in line. The problem is only exacerbated when families take on numerous debts without realising they all add up to a significant amount of money every month. If you find yourself having difficulty managing your monthly payments, refinancing with a secured loan is one way out.

As an example, let us say you are paying on two credit cards and a personal loan every month. All three payments have different due dates, requiring you to juggle your weekly salary in order to ensure each one is paid on time. Throwing in the rest of your monthly payments (mortgage, insurance, food, etc.) adds to the confusion.

You can combine those two credit cards and the personal loan into a single monthly payment when you refinance. That single payment has its own due date that will not change for the life of the loan. In doing so, you will have reduced some of the confusion of planning your monthly budget.

Refinancing for better budget management is especially helpful for workers who are paid biweekly. With fewer payments to worry about, it is a lot easier to direct your finances appropriately.

4. You Have a Substantial Amount of Equity

Lastly, you should consider refinancing if you have a substantial amount of equity that is otherwise not helping you. Think of equity as a star striker on a football team. That player may be one of the best scorers on the team – but only if he gets in the game. Equity is very similar.

Equity is one of the most powerful financial tools a homeowner has available to them. However, it is only useful if it is used. You may have tens of thousands of pounds in equity after paying your mortgage for so many years; why not take advantage of it to refinance existing debt at a lower rate and a longer-term?

A secured loan represents an opportunity for you to use your home as a source of funding to refinance your current debt load. There are plenty of lenders out there willing to loan you the money you need today. Secured Loan Experts encourages you to consider taking advantage of those loans to improve your financial position. Refinancing can help you better manage your monthly budget, reduce your interest rates, and even improve your credit score.

To explore whether refinancing is right for your individual circumstances don’t hesitate to call our expert team in total confidence. Our professional advice is free.

Sources:

  1. Money Advice Service – https://www.moneyadviceservice.org.uk/en/news/too-many-first-time-buyers-blow-their-home-buying-budgets-14022014

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