As the housing market continues to recover from the credit crunch, homeowners are increasingly taking advantage of the low interest rates on mortgages and rising house prices to free up some additional cash. Remortgaging has always been a fairly popular way of raising some extra money, but is it a viable way of consolidating your debts?
Prior to the last housing bubble bursting, taking advantage of the equity in your home was an extremely common practice. People were using it to pay down higher interest debts, finance remodelling work in their home or simply to spend it on luxuries. When the crash happened, people got a little more serious about paying down their debt ahead of borrowing more.
Now that borrowing rates are extremely low, people are starting to leverage their equity once again. On the surface it seems like a smart thing to do – borrowing money and using your home as collateral is typically the best way to get a good deal on a loan. However, as the fear of a new housing bubble starts to rise, is it a smart move to withdraw equity to pay down other debts?
Short-term v Long Term Debt
Releasing the equity to cover higher interest debt makes sense on the surface. Rates are typically lower on mortgages than on unsecured borrowing, but you need to factor in the length of time it takes to repay the money. With far greater repayment periods, you may end up paying back a lot more in the long term.
The risk with trading short term debt for long term is the temptation to slip back into old habits. If you’ve cleared your credit cards through remortgaging it can be tempting to start spending on them again, ultimately defeating the purpose or refinancing. If you’re clearing short-term debts with long-term, you need to commit to new spending habits.
One of the most effective ways of spending the money from remortgaging is to redevelop your property to add extra space, such as a loft conversion or an extension. This will add value to your home and possibly prevent the need to move to a bigger property, avoiding the myriad of fees which come with it.
Adding an extra room to your home, having a new kitchen installed or adding a conservatory are all proven ways of adding value to a property, which could generate a decent return on your investment if you decide to sell.
The key to taking advantage of the current low mortgage rates is to use the money wisely and to be conscious of your spending. If you’re consolidating debts, make sure you don’t start building new debt once the short term has been dealt with. Leveraging your equity in your home can be a useful way of rearranging debt – just be smart about your spending afterwards.