Debt Consolidation Mortgages & Remortgages

We’ll look at the different ways to consolidate debt using the equity you’ve built up in your home and how to assess whether a debt consolidation mortgage might be the right option for you.

Can you consolidate debt into a mortgage?

Yes, you can. If you have a mortgage, there are several ways you may be able to use the equity you’ve built to consolidate other debts and better manage your finances into one single payment. However, you must be a homeowner as you cannot consolidate debt into a new mortgage as a first-time buyer.

Lenders will also consider your debt-to-income ratio. This is where your household income must be within a certain ratio of the debt; otherwise, lenders won’t proceed. This is to prevent clients from habitually borrowing outside of their means to refinance debt.

If you have previously consolidated debt onto a mortgage, you will be considered a higher risk by some lenders.

What debts can you consolidate into a mortgage?

Almost any type of unsecured debt can be consolidated into your existing mortgage.

This includes:

• Loans
• Credit cards
• Hire purchase agreements
• Store cards
• Overdrafts
• Student finance
• And other forms of debt

Some lenders have criteria that exclude some debt being consolidated, such as tax bills or business debt.

How to get a debt consolidation mortgage

Your first step should be to speak to a broker who specialises in debt consolidation remortgages. Their knowledge and expertise could help you get a much better deal.

Make an enquiry, and we’ll match you with an expert in this area who can help with the following:

• Calculating your LTV (loan-to-value): Your loan-to-value ratio will tell you how much equity you can release. You can work it out yourself using this calculator, but your broker will then match you with the lender who is best placed to help based on your ratio.
• Downloading your credit reports: You can do this by accessing a free trial, but it’s best to have a mortgage broker on your side so they can help you optimise your credit files and ready them for your application.
• Finding the ideal lenders for debt consolidation: The right mortgage broker will have a network of contacts in this area, and they can help you secure the best rate through one of the lenders they work closely with.

How do they work?

Homeowners with an active mortgage have 3 potential options when it comes to using their mortgage to consolidate debts, these are:

• A further advance
• Remortgaging
• A second charge mortgage

We’ll have a look at how each of these works below.

Further Advance

This is essentially increasing the amount of your existing loan without changing the mortgage terms or provider, although the additional borrowing may be offered at a higher interest rate.

There is typically a minimum amount that you can increase your loan by (often in the region of £5k). There is also often a maximum percentage you’ll be able to increase the LTV (Loan to Value) of your borrowing, typically capped at around 80%. You may also have to pay administrative fees to arrange the additional borrowing.

If your lender offers this facility, you’ll need to meet their criteria for borrowing more, which will vary from one lender to the next, but usually means:

• You’ll need to have had the mortgage in place for at least 6 months
• You’ll need to undergo another credit check and affordability assessment
• You may need to provide proof of the debt you plan to clear
• You may need a new property evaluation to determine your equity (the amount you own)
• Most lenders will need you not to have missed mortgage repayments over a certain period, which is typically the last 12 months.

Remortgage

You might consider a remortgage for many reasons, and whilst it’s often associated with securing a better interest rate, you can also remortgage to consolidate your debts. This means you’ll switch to another lender, take out a mortgage with them to repay your existing mortgage and borrow an additional amount to repay your debts.

This could be an appropriate option for those looking to consolidate a significant amount of debt, as a remortgage typically allows you to increase your borrowing more than a further advance would. You also need to make sure you’re not under any repayment penalty period before proceeding.

Second Charge Mortgages/Secured Loan

The name can be misleading here, as a second charge mortgage, also known as a second mortgage, is simply a loan that’s secured against your home. Because your mortgage is already secured against the property, that’s the first charge against the property. Therefore, using the same property as loan security will be the second charge against it.

This option can be useful for those who may not qualify for a remortgage or further borrowing due to bad credit, as second-charge loans are based more heavily on the value of your equity rather than the more traditional affordability or eligibility factors used to approve a mortgage.

Do you have to remortgage with your existing lender?

No, but it’s always a good idea to see what kind of deal they would be willing to offer so you can compare that with what else is available. One thing to remember with debt consolidation remortgages is that some lenders have an LTV cap set at 60-85% if you use the released equity to pay off debt.

You’ll also need to consider whether you might pay early repayment charges if you choose this option.

Calculate your debt consolidation

Our mortgage calculator will help you determine how much you could reduce your monthly outgoings by consolidating your debts with your mortgage.

Remember that calculators only provide a guide, and the results should not be taken as a guarantee of your borrowing or saving potential. A broker can help you determine a more reliable figure.

Pros and cons of consolidating debt

It’s perfectly possible to use your mortgage to consolidate your debt; however, the next important question to ask yourself is whether you should. The main arguments for and against are outlined below.

Given the level of risk involved with using your home as collateral, it’s also important that you speak to a qualified mortgage broker and get the right advice before taking on any additional form of secured lending.

Benefits

• It can potentially reduce your overall monthly outgoings.
• The interest rates on secured borrowing are typically much lower than on unsecured borrowing.
• It could simplify your financial management to repay all your debts to one lender rather than staying with multiple lenders, each with different interest rates.

Disadvantages

• Any additional secured borrowing against your home puts it at greater risk should you become unable to make the repayments.
• Adding unsecured debt to secured debt over a longer period increases the amount of interest you’ll repay and puts your property at risk. In contrast, it was not at risk before when it was an unsecured debt.
• Increasing your mortgage debt reduces the amount of equity you hold in your home and can affect the interest rates available to you, as competitive rates tend to be reserved for low LTV borrowing.

Given the level of risk involved with using your home as collateral, it’s also important that you speak to a qualified mortgage broker and get the right advice before taking on any additional form of secured lending.

What are the main factors which lenders will assess?

The most important factor is your loan-to-value ratio, as some remortgage providers insist on a cap of between 60% and 85% if you are consolidating debt.

You will also need to meet the lender’s general eligibility criteria, which will include an assessment of the following:

• Credit history: The cleaner your credit, the better your chances of securing a good deal, although there are usually options for borrowers with bad credit.
• Age: You won’t qualify for a remortgage with some lenders if you are over 75, but with other providers, it can be 85 or higher.
• Property type: If your property has non-standard construction, such as a thatched roof or timber frame or is a listed building, your choice of remortgage lenders will be fewer.

What if you have bad credit?

If you have bad credit, it may affect your chances of securing a mortgage to consolidate debt. However, this will depend on the severity and age of your credit issues, as well as the lender. Some lenders specialise in bad credit mortgages and could possibly offer you a remortgage for debt consolidation, even if others are unable to help.

In some cases, it may not be possible to remortgage until your credit record is in better shape. Some mortgage lenders may be particularly reluctant to offer a remortgage if you’re in arrears or have missed payments on your existing mortgage.

Can you remortgage a Shared Ownership mortgage to consolidate debt?

It’s certainly possible but may be more difficult, as you’ll need to consolidate debt with a mortgage lender that still offers Shared Ownership mortgages, reducing the number of lenders available to you. The brokers we work with will be able to help you find lenders that can help.

It’s also worth bearing in mind that the terms and conditions of your shared ownership scheme may vary depending on which housing association you’re connected to. Informing them of your intention to remortgage is also recommended.

Get matched with a debt consolidation mortgage broker

If you’re planning to consolidate your debts by utilising the equity in your home, it’s important to seek the right advice from an expert in this area of lending.

The brokers that we work with have the knowledge and experience to help ensure that you make the right decision for your circumstances.

Simply contact us on 0330 818 7026 or make an enquiry and we’ll introduce you to the most appropriate broker for your needs. Our service is completely free of charge, so you have nothing to lose!