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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 15th October 2020*

A debt consolidation mortgage could help you improve your situation if debt is holding you back. But how exactly does a debt consolidation mortgage work, is it more cost-effective than paying your debts back over a longer period, and is it right for you?

We answer all those questions and more in this article.

Select a topic from our menu below for more information or read on for a thorough understanding of how debt consolidation mortgages work.   

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What is a debt consolidation mortgage?

A debt consolidation mortgage is where you take out a single loan using the available equity in your property to help pay off debts such as car loans and hire purchase agreements. By releasing some of the money you’ve already paid towards owning your home, you could reduce the amount of debt you owe overall, simplify your budget and take the pressure off your finances.

A debt consolidation mortgage could help you reduce your overall monthly payments, leaving you with ‘freed-up’ cash to put towards your debts or to provide you with a more affordable standard of living.

This type of loan is also referred to as debt consolidation re-mortgage because, whilst while a mortgage and re-mortgage are normally two separate products, in this instance, they are referring to the same product.

How does it work?

In order to qualify for a debt consolidation mortgage, a lender will assess the following:

  • Your credit report and what debts you have
  • The value of your property
  • What percentage of your home you own outright
  • How much you want to borrow compared to your income

Many lenders will require you to sign an undertaking drawn up by a solicitor before agreeing to lend. This is an agreement where you commit to repay your debts in full on completion of the advance, though if you already have enough income to deduct your commitments from, then this won’t often be necessary.

However, if your old mortgage deal has a great rate of interest that you would lose if you remortgaged onto a new deal, the good news is that you may be able to consolidate your debts with a second charge loan.

You can read about how second charge loans work further down in this article.

Why would I consolidate debts into a mortgage?

Remortgaging to clear debts could work out cheaper for you in monthly payments and make your finances easier to manage.

Unsecured debts typically have higher rates of interest compared with secured loans, as there is no security for the lender to fall back on should you be unable to pay your debts back. Because of this, you could get a better rate than if you continued to pay back your loans as normal or if you took out an unsecured loan to settle the other outstanding debts.   

With a debt consolidation mortgage, you could pay off the following unsecured debts:

  • Credit cards
  • Personal loans
  • Payday loans
  • Overdrafts

Theoretically, if you had £5,000 on one credit card with an interest rate of 24.5%, plus a loan of £10,000 at 11.5% APR plus another loan of £7,500 at 16.95% APR, your combined debts would come to £22,500.

With interest over a 10-year period, your amount paid could reach a whopping £45,923 – that’s £23,423 worth of interest.

However, with a 10-year debt consolidation remortgage with an interest rate of 5%, you could pay back a total of £28,638 instead.

Before you take out a debt consolidation mortgage, speak with one of the expert remortgage brokers we work with for a free, no-obligation chat. They can review your circumstances and recommend your best course of action.

Is it a good idea?

For some people, yes. For others, it may not be the best course of action. As mentioned previously, you could increase your monthly mortgage payments if you switched to a new plan because the interest rate you secured years ago may no longer be available in today’s financial climate. You could also end up paying back longer than you’d originally planned.

You’ll also have to be mindful of the fact that, should you run up debts again, you’ll have to pay back both the debt consolidation mortgage plus your new debts.

However, debt consolidation remortgages could be the answer to many peoples’ problems, as consolidating your debts into one, easy-to-pay sum could be simpler to manage and more affordable each month. It could also prevent individuals from getting into further debt, defaulting on their accounts, incurring possible CCJs, or even being made bankrupt.

With so many factors to consider, you may find it in your best interest to speak with a remortgage broker first.

They can help you answer the following questions:  

  • What interest rates can you get?
  • How long will the term length last?
  • What will the new monthly payments be?
  • Will it be cheaper overall?
  • Are there any alternative products which would be more suitable?
  • What fees should I expect?
  • Should I get a fixed or variable mortgage?
  • Will a debt consolidation actually improve your circumstances?

How much could I borrow?

The amount you could get will depend on how much equity you have freed up, your credit history (if there’s any previous bad credit, a remortgage with bad credit may also be possible), and if you meet a lender’s affordability criteria. Your total debt-to-income ratio may also be factored in, though each lender will allow you to borrow subject to the product’s limits.

Some lenders may agree to let you borrow up 90% loan-to-value (LTV) for properties worth £500,000 and over, whereas other lenders will cap how much you could borrow to consolidate debts, for example, £30,000 or £50,000. 

Other lenders are more concerned about how your debts were accrued and will not base their decision to lend on your debt-to-income ratio – instead, your case would be judged on its own merits.

Debt consolidation vs. Second mortgage: What’s the difference?

Unlike a debt consolidation re-mortgage which puts your mortgage on a new plan and raises cash to pay off your debts, a second charge mortgage is a type of secured loan, usually taken out with a separate lender, which uses your home as security. This means that you’ll have your first mortgage (first charge loan) plus a second mortgage, which you can use to pay off your debts.

A second charge loan may be a suitable alternative option to a debt consolidation mortgage as you would still be able to keep your first mortgage without losing the interest rate, which may be better than the rates you could secure today.

Can I consolidate my debt as an older borrower?

Yes, if you’re an older borrower or retired, it’s still possible to get a debt consolidation mortgage. Many lenders will factor in your age, how much income you have and how much you have left to pay off your mortgage before deciding how much they could give you. Other lenders cap the amount they will lend to older applicants, for example, £10,000.

Whether you’re offered any kind of re-mortgage deal in later life may depend on exactly what age you are, as many mortgage providers have age limits. Most won’t lend to customers over 75, some 85 and a minority have no age limits at all.

The advisors we work with know exactly which lenders will offer the best rates to customers based on their age. Make an enquiry and they’ll match you with the right provider for you.

Which providers offer debt consolidation remortgages?

Fortunately, many lenders offer debt consolidation re-mortgages, though the lending criteria for each can vary greatly. Some well-known lenders who will consider offering these products  include:

  • Natwest
  • Nationwide
  • Bluestone
  • HSBC 
  • Halifax 
  • Barclays 
  • RBS
  • Virgin Money
  • Accord Mortgages 

However, there are plenty of other mortgage lenders who cater for individuals with specific needs, such as bad credit. See below for more information on how a broker could help you.

Speak to an expert

By working with an expert mortgage broker, they could help you find the best deal for your needs and circumstances thanks to their ‘whole-of-market’ access. They may even be able to secure deals that aren’t available direct to the public.

Make an enquiry or call us on 0808 189 2301 and see what a mortgage broker could do for you. All enquiries are free and there’s no obligation to take things further.

Updated: 15th October 2020
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.