How to Refinance Using Your Property as Security
Late last year, UK consumers set a financial record. It was not the type of record we should be proud of. As of November 2013, the average consumer in the UK had outstanding personal debt of just under Â£28,500. Never before has there been a greater need for debt refinancing. And never before has there been a greater need for people to use their property as a debt refinance tool.
In fairness, a good deal of the personal debt now being repaid by Britons is tied up in mortgages. However, the next largest category is comprised of high interest, unsecured credit vehicles such as personal loans and credit cards. These are the kinds of debts that are destroying household budgets to the point where some experts believe families have to borrow more just to pay for daily living expenses.
If you find yourself in such a position, there is a way out by using your property to refinance all of that high interest debt. You do it by taking advantage of your equity. Bear in mind that what we are about is not remortgaging or taking out a second mortgage; it is using the equity in your property to obtain a secured loan with a lower interest rate and better terms.
Equity Is Your Friend
We like to think of equity as that portion of your home you actually own, as opposed to portion the bank still owns by way of your mortgage. You can calculate equity very simply by subtracting how much you still owe on your mortgage from the retail value of your property. For example, if you still owed Â£60,000 on a home worth Â£120,000, you would have equity of Â£60,000.
Equity is your friend because it allows you to borrow money against it. You could take out a secured loan with the understanding that a bank could repossess and sell your property if you did not make your payments. By loaning no more than Â£60,000, the bank is pretty safe in assuming it can recover its money in the event of default.
Equity Works for You
The beauty of taking a secured loan against your property is that doing so engages your equity to work for you rather than sitting idly, doing nothing. Think of in terms of a seed. There is a lot of potential in a seed, but until it's planted and watered, nothing will come of it. Your equity is the same. You have a lot of financial potential in your equity, but only if you engage it.
Borrowing against your equity makes it possible for you to combine all of your high interest debt into a single, more manageable secured loan. Secured loan rates are typically lower than the rates on unsecured debt because you are offering your property as security.
Let's do the maths:
Let us assume you have a personal loan and credit card, both at 9% interest, with a combined balance of Â£10,000. If you were able to pay the entire balance in one year, your total payments would equal Â£10,900. However, if you combined both into a secured loan at 4%, you would only pay Â£10,400. As you can see, there is a savings of Â£500 over just one year. Imagine how much you would save over several years.
You can use the equity in your home to refinance your high interest debt. Refinancing your debts through a secured loan eases the pressure on your budget by making monthly payments lower and more manageable.
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