Re-mortgaging in order to pay off a credit card debt?

When people go into credit card debt they are often advised to re-mortgage their house if there is any equity in the house.  This can work in some circumstances, although caution has to be exercised.

Loans that are secured on a house have a lower interest rate than loans that are not secured because there is less risk of the loan not being paid off.  Re-mortgages are also easier to administer as they are larger and they also tend to have fewer movements than a credit card.

As the debt can go on longer then there will be lower payments per month that can be more closely fitted in with the monthly salary payments.

One of the biggest problems that the borrowers can find is that they could lose their house if they do not pay the agreed payment at the agreed time.  If this was done with a credit card then this would not put the house at risk as directly, at least not unless bankruptcy was declared.

Another disadvantage is that there is a higher proportion of debt on a house.  This can mean that the total interest rate on the mortgage is higher.  Thus if a home loan is available for 6% on a 70% mortgage but it is 8% on an 80% mortgage, the additional interest rate is not 8% on 10% of the loan, but it is in fact 22% on that extra 10% of the loan – something that is quite close to a credit card rate.  This is because the extra cost of the mortgage is not just the interest on the loan but the premium that is on the existing loan, which is equivalent to 14% (or 2% multiplied by seven).  This has to be added to the loan interest on the extra amount borrowed.

Another issue is that some lenders may start to insist on mortgage insurance if the loan to value ratio goes up, then the home loan lender may insist on mortgage insurance.  This is an insurance policy that covers the mortgage lender in case the borrower defaults on their home loan.  Although the beneficiary is the lender, the borrower pays the premiums.

The other issue with taking out a new loan on the house is that it may force a revaluation of the house that is being used for the loan, which may result in a lower house price and so a higher loan to value ratio.