Debt Consolidation Mortgages – How does it Work?

Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. You may have to pay an early repayment charge to your existing lender when you remortgage. Think carefully before securing other debts against your home.

A Debt Consolidation Mortgage means that you will be able to put all of your existing debts on your mortgage into one payment. This payment will usually be lower than the total multiple payments you are making and at a lower interest rate. You will borrow a lump sum amount of the total amount you owe in debts. This amount will be an additional borrowing on your Mortgage. You then pay all your debt in one place with your existing Mortgage provider in one payment.

The type of debts you could consolidate:

  • Credit cards
  • Loans
  • Car Finance
  • Payment plans
  • Store Cards

Why should I consider a mortgage for debt consolidation?

  • A lower Monthly payment, which means less pressure on your family budget
  • An enhanced Credit Score over time
  • Easier to manage and maintain one monthly payment, compared to multiple debts payments
  • Release Equity from your property to clear debts

What are the things to watch out for when doing a debt consolidation mortgage?

  • If you take a loan over a longer term, you may end up paying more interest on your debt overall, than if you have short term personal loans. For example, if you put your debts on your mortgage with a 20 years term, you will of course pay interest on that debt for the 20 years of the mortgage. A personal loan may only be for 5 years, and so with a personal loan you would only pay interest over that shorter term.
  • A mortgage is a loan secured against your home. Your home may be repossessed if you do not maintain repayments on your mortgage or any other loan secured against it. You may have to pay an early repayment charge to your existing lender when you remortgage. So you would want to think carefully before securing other debts against your home.

 

What are the alternatives to a remortgage for debt consolidation?

  • If you have a small debt on credit cards, it may be more cost effective for you to look interest free balance transfer credit cards instead.
  • Family and friends may be able to help and lend you money that you can use to pay off your debt. And they may be willing to lend you money interest free.
  • A personal loan, which is not secured against your home, may also be a possible alternative to raising money with your mortgage. Check what interest rate you would get on a personal loan and if the maximum amount you could borrow (which is usually up to £25k) would cover your total debt; review how much total interest you will pay over the term you have chosen and compare that with the total interest payable with a mortgage instead.
  • If you have any savings, it may also be a good idea to use your existing savings to clear off first any expensive debt, rather than paying interest on that debt.

 

How to check if a mortgage for debt consolidation makes sense?

  • Check three important things: (1) the interest rate on your mortgage and if this will be cheaper than the current interest rates you are paying on all of your debts; (2) the total £ interest payments that you would pay over the length of the mortgage, vs the total interest you would pay with your existing debts; and (3) the new monthly payment with a mortgage, vs your current total debts payments.
  • Often time, the main goal of debt consolidation is to “reduce” the monthly debt payment with mortgage, to ultimately put less pressure on the family finances. But do not forget those other criteria mentioned above, as with a mortgage you may end up paying more interest over a longer term in the end.

What are the costs involved with a mortgage for debt consolidation?

The costs will depend on things like:

  • The total amount you are borrowing
  • The interest rate available to you on the mortgage, which in turn will depend on things like the loan to value (LTV) on the new mortgage, and on your credit score
  • The amount of years you wish to borrow for
  • If there are any early repayment charges on your existing debts

How do I qualify for a debt consolidation mortgage?

  • You will need to pass a credit check
  • The lender may get you to sign a declaration that you will clear all your debts
  • The lender may want to see proof of all the outstanding debts
  • The lender will do an affordability check to make sure you are able to maintain a new increased monthly mortgage payment
  • The lender will check if you have sufficient equity in the property to borrow against, as most lenders will only allow you to borrow up to 90% LTV maximum.

 

Can I retain my existing mortgage, if I consolidate my debts?

  • There are options to retain your existing mortgage, and consolidate your debts on either a further advance or on a second charge mortgage.
  • If you are locked in an initial deal period with your current mortgage, for example if you are within your initial 5 year fixed rate period, you may not be able to remortgage unless you are prepared to pay any early redemption charges with your current mortgage provider. Furthermore, your current mortgage rate may be cheaper than a new one on offer.
  • If this is the case, it can be more cost effective to retain your existing mortgage, and consolidate your debts instead with either:
    • A further advance, which is a new loan from your current mortgage lender. A further advance is a loan secured on your property, similarly to a mortgage.
    • Take out a second charge Mortgage, with a different mortgage provider.
  • With both of those options, whether further advance or second charge, your existing mortgage will remain on it’s current rate and terms; only the new amount borrowed will be under new terms.

Practical points when you want to consider a mortgage to consolidate debts

The main purpose to consolidate all your debts in one place is to reduce the amount you pay each month, so that you can alleviate the pressures on the family budget.

As you will be paying less each month, you may have more disposable income left at the end of each month. If and when you will have any surplus left-over money, you could also make overpayments towards your mortgage, which would help clear your debt faster and pay less interest in the end. Most mortgage lenders allow you to overpay by up to 10% of the capital balance each year; remember to check this first, before you consider making any overpayment, otherwise you may risk being charged early redemption charges.

With a debt consolidation mortgage, you should make sure you are not putting yourself in a worse position than you started off at, which means not to get yourself into more debt by running up the credit cards again or borrowing more by other means.

For a debt consolidation mortgage to help you, you should ideally be on a repayment mortgage. With an interest only mortgage you will not clear the debt and continue to only pay interest.

Make sure that the lender allows you to make overpayments usually up to 10% a year without a penalty if you plan to clear the debt off sooner or else consider looking for a mortgage that doesn’t have any early repayment charges.

Furthermore, calculate the total repayments you are currently making with the debts you want to consolidate, and make sure the new mortgage payment is less than that current total repayments, so you know it is affordable and how much spare money you could save to help you budget correctly.

What should I do to explore my options with a debt consolidation remortgage?

Debt consolidation is a specialist area. Not all mortgage lenders will consider it. You would to seek the advice of an experienced mortgage broker, that can review your circumstances and goals, and advise on the available options, as well as explaining the costs and the benefits to you.

Please contact us at Your Mortgage Experts on 020 815 411 11 for more expert advice on getting a mortgage for debt consolidation, or drop us a line hello@yourmortgageexperts.co.uk

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Shapla

Mortgage Expert

Shapla is a Mortgage and Protection Specialist with years of experience helping people with their mortgage and protection needs. Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through our advisors' wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that people have come to rely upon for all their mortgage and protection needs.

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