Debt consolidation remortgage guide

For many reasons, financial situations can change. It can be challenging for those who are struggling to pay off debt. You can feel overwhelmed by the constant worry of how everyone is going to be happy. Adding interest to money you owe can cause you to feel out of control and put you in a position you might never get out.

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Are there alternatives to debt consolidation remortgages?

There may be an alternative for homeowners who own their homes. You can either take out a secured personal loan or a refinance to consolidate your debts. You should be aware that these actions could result in higher credit fees over the long term than the current arrangements.

After consulting a mortgage advisor, you may decide that remortgage to consolidate debt is the right choice for you.

The other aspect of this is deciding which remortgage deal is the best or you may need to stay with your mortgage company or switch to another provider.

This could result in fees and penalties. Make sure you do your research and remember that these actions could result in total credit fees being higher long-term than the current arrangements.

Your debt consolidation remortgaging options

If you have an active mortgage, there are three options for homeowners who want to use their mortgage to consolidate debts.

• Another advance
• Remortgaging
• A second charge mortgage

Below, we’ll take a closer look at each one.

Continued Advance

The easiest option is to ask your lender if they are willing to give you a second advance.

The additional borrowing can be used to increase the amount of your existing loan without changing the terms or provisions of the mortgage. However, the interest rate may be higher.

You can only increase your loan amount by a certain amount, often in the range of PS5k. You can also increase your loan to value by a certain percentage, usually around 85%. Additional borrowing may require you to pay administrative fees.

If your lender offers this option, you must meet their criteria to borrow more. These criteria can vary between lenders but generally include:

• The mortgage must have been in place for a minimum six months
• Another credit check will be required.
• You may need to show proof of the debt you are trying to pay off
• To determine your equity (the amount of property you own), you may need a new property assessment.

Remortgage for debt consolidation

Remortgaging your home is an option if you own a property with sufficient equity. This will allow you to release some equity and give you a lump sum you can use for the money you owe.

The maximum loan to value (LTV) currently is 90%. This means that if your home has a market value of £100,000., you can borrow up to £90,000.

For example, if your house is valued at £250,000 and your mortgage £110,000, you can borrow up to £225,000 to pay your debts. This would give you a lump sum payment of £115,000 however all of this is subject to lenders’ affordability assessment.

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Monthly Repayments

Remortgaging your home to consolidate debts can provide significant financial benefits.

It is important to remember that each case is unique. Therefore, verify how this would work in your particular situation.

Second-charge mortgages

This name could be misleading since a second-charge mortgage, also called a second mortgage, simply refers to a loan that is secured against your home. Your mortgage is already secured against your property so it’s the first charge against it, and this will apply even if the property is used as loan collateral.

This loan option is helpful for people who are not eligible for a remortgage or additional borrowing because of bad credit. Second-charge loans are based on your equity value, not the traditional affordability or eligibility criteria used to approve a mortgage.

Unlike a further advance made with your current lender, a second charge mortgage is usually taken out with another. If you cannot get a competitive rate on your mortgage with your current lender or don’t want high exit fees, this can be an alternative to remortgage.

You may need their permission to obtain a second-charge mortgage on the same property, depending on who your first mortgage was.

Can I consolidate my debt using my mortgage?

While we’ve discussed that you can use your mortgage to consolidate debt, it is not a bad idea.

We’ll look at the arguments in favour and against this method of consolidating debt. However, it is important to speak with a broker to get the right advice and obtain the right information before you take on any additional secured lending and this is because of the risk associated with using your home for collateral.

Benefits

• This can reduce your monthly expenses. If you borrow PS15,000 for a personal loan over 10 years, at 9.9% APR, your monthly payments would be PS193 each month. With a 10-year debt consolidation mortgage at a 3% interest rate, your monthly payments would only be PS145 per month. This is almost half the cost of a PS50 monthly savings.
• Secured borrowing typically has a lower interest rate than unsecured borrowing.
• This could make your financial management easier by allowing you to pay all your debts to one lender instead of staying with several lenders with different interest rates.

Consider these things

• If you are unable to repay the loan, any additional secured borrowing against your house puts it at greater risk.
• Consolidating your monthly expenses may help you reduce them. Still, it is essential to remember that you will be paying interest for a more extended period, so you could end up paying more. This could lead to higher interest payments even at a lower interest rate.
• The LTV of your borrowing will rise if you borrow more against your home’s value. This can reduce the equity in your home and affect the interest rates you can get. Low LTV borrowing tends to attract lower rates.
• A lower equity level in your property can make it more costly or even impossible to remortgage until your LTV decreases. This could be done by either repaying a large portion of the loan or increasing the property’s value.
• There are two possible outcomes to house prices falling and rising: additional borrowing or negative equity. This is where you owe more money than your home costs.
• Consolidating credit card debts can lead to people reusing the same cards and defeating the purpose of consolidation. This will increase their overall debt. However, this can be avoided if you close your credit accounts immediately after repaying them.

Which lenders offer debt consolidation remortgages?

Although many lenders are willing to consider debt consolidation mortgages for their clients, each lender has its own criteria. Some lenders will limit the amount of debt that can be consolidated, while others won’t.

Halifax doesn’t limit how much debt you can consolidate; however, the maximum amount borrowed must not exceed 85% LTV.

HSBC, however, limits the amount of debt you can consolidate to £50,000. It also restricts borrowing to a maximum 80% loan-to-value (60% for interest only).

The same Santander or Platform will factor in the affordability of the debts paid off.

Nationwide has a maximum loan-to-value limit of 80% on its borrowing, while Santander allows up to 85% LTV.

Santander also has a cap of £50,000 for loans that are used for consolidation purposes and Santander is not the only lender that offers this type of mortgage deal.

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What if your credit score is not good?

As with any type of mortgage, bad credit can affect your chances of getting one. However, this will depend on your credit history and the lender.

Many lenders specialize in poor credit mortgages and may offer you a refinance to consolidate your debts.

Some cases may not allow you to remortgage until the credit is better. Mortgage lenders might be reluctant to approve a remortgage for those who are in arrears and have missed payments on an existing mortgage. However, in these cases, you might still be eligible to apply for a second charge mortgage.

Match you with a mortgage broker who specializes in debt consolidation

It is essential to get the right advice from an expert in the area of lending if you are looking to consolidate debts using the equity in your house.

Our brokers have the experience and knowledge to ensure you make the best decision for your situation and do not end up making things worse.

They will help you find the best lenders that are flexible and make the most of your equity. They can help you explore your options if you have bad credit as their whole-of-market access also means you won’t miss out on any lenders that work only with intermediaries.

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FAQ’s

To consolidate my debt, can I remortgage my share ownership property?

Although it is possible, consolidating with a mortgage lender offering shared ownership mortgages will make it more difficult. This will reduce the number of lenders you have. Our brokers will help you locate the right lenders.

Keep in mind, however, that terms and conditions for your shared ownership plan may differ depending on the housing association to which you are connected. It is also good to inform them about your intention of remortgaging.

What happens if I already own the property?

Remortgaging on the unencumbered property is possible even if you have already paid your mortgage. Some lenders may even offer 95%, depending on your financial situation.

Consider that your home is not your primary residence, and you can use it as collateral.

Will debt consolidation affect my credit rating?

Your credit score may drop short-term while your lender does the necessary research before approving your loan. The long-term prospects are much better as everything is under one payment. 

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