Remortgaging - it's still the best way to restructure your debt and pay less

Wed 29 Aug 2007

THERE is often a view that "a debt is a debt" and that the most important element of it is how much is outstanding rather than how much you are paying in interest on what is outstanding. For the indebted, the options to shift balances and organise better rates of interest are too often driven by a response to a TV or newspaper advert which encourages you to pay off all your debts and make it a lump sum and, while you're at it, have a holiday as well. This is not the best way forward.

Individuals in debt need to look at the interest they pay and see if they can reorganise their borrowings to reduce interest payments and consequently the outstanding capital.

The problem is that, for the most indebted, the options start to run out and it is only those wanting to charge the highest interest rates that are willing to lend to restructure the debts.

You need to look at the debt that is incurring the highest percentage of interest. This may not be the biggest debt, indeed your mortgage is likely to be the biggest debt but have the lowest interest rate. The first thing you must consider is remortgaging your property, both to get a better deal on interest rates but also possibly to increase your borrowings to clear your debts. The latest figures from the Council of Mortgage Lenders (CML) shows that remortgaging almost equals the number of loans for house purchase. In June alone there were 96,000 remortgages compared with 102,000 loans for house purchase. Everybody is doing it because it makes sense both to change your mortgage to get a better deal and also to release some of the equity in your house to pay off expensive unsecured debts.

The average debt of someone taking out a protected trust deed is just under £39,000. If they were to add this debt to their mortgage, the interest over ten years - if they paid none of the capital - would be £24,375 if they were paying half a per cent above the current base rate. The same debt with credit card interest of, say, 19 per cent, would require £74,100 to be paid without clearing any capital. Getting your debt charged to the lowest rate of interest is crucial to clearing it in the shortest possible time. Rearranging a mortgage is, therefore, a priority.

But let's say you can't rearrange your mortgage. You are already at your limit, you may have defaulted and you are only being offered deals from the most expensive of lenders.

What you need to look at next is borrowing money at a lower interest rate. Loans can be useful for this as long as you don't also run up more debt on credit cards. You must cease all spending on credit cards to reduce the overall debt. Borrowing £10,000, say, may get you a lower rate of interest than you are paying on your credit card debt although the recent financial turmoil in the world economy may have dried up some of these options. However, as recently as last week several major lenders were advertising loans of up to £10,000 at rates of interest below 7 per cent - this would allow a cash strapped individual to restructure their debt into something more manageable on a monthly basis.

The final option for restructuring your debts is one that was very popular but is less common now because lenders have wised up to the actions of borrowers. There used to be a term for borrowers who changed credit cards frequently - "credit card tarts". Doing this means you transfer balances to interest-free cards for fixed periods and just before that period ends you change to a different card.

Now, however, you would be hard pressed to find many lenders offering free balance transfers and those that did would not be offering interest-free periods.

Source: http://business.scotsman.com/index.cfm?id=1350582007