Many people have debt in the form of loans, credit cards or mail-order catalogues and the interest rate on these can be high. One way in which people look to reduce their outgoings is through a remortgage to pay off the debt. Here we explore how you can consolidate debt with a mortgage or remortgage.
What is debt consolidation?
Debt consolidation is where you take out either a remortgage, secured loan or an unsecured Loan to pay off some, if not all, your unsecured debts – so going forward you only have the new borrowing to pay for.
What are the advantages of remortgaging to pay off debt?
Less Financial Strain – Maybe you have more money going out than what you have coming in, a situation nobody wants to find themselves in but it happens, a lot more than what you would think, causing constant stress of not being able to pay a bill and managing payments.
You want to improve your credit profile – Maybe as a result of having many debts to manage and with very little spare money each month, this has resulted in missed payments, defaults or perhaps County Court Judgements (CCJ).
Structured Repayment Plan – Credit cards can seem like they never reduce and you simply want a structured repayment plan where you will pay XX per month over XX years and then the debt will be paid off.
Lower Rate – Credit cards and loans can be expensive whereas a mortgage rate could be lower and may be save you money in the long run.
What are the disadvantages with a debt consolidation remortgage?
The debt is now secured – By paying off the debts with a remortgage you are taking unsecured debts and securing them against your property, so if you fail to keep up with the repayments your home could be repossessed.
Extended Term – Although your monthly payments may be less, but have you extended the term in which the debts will be repaid? – this may cause you to repay back more in the long run.
Your Credit Score – Improving your credit score and overall profile is not a quick fix and can take time.
When should you not consolidate debt into a mortgage?
There are scenarios where you shouldn’t remortgage to pay off debt. For example, if certain debts are under £1000 or have less than 12 months left to run, by consolidating this it would cost you a lot more over the mortgage term, so it would be better to pay these off yourself over the next 6 months.
Maybe you have your credit cards on 0% interest basis, so all the payments you make will reduce the balance, therefore consolidating this into the mortgage and paying interest wouldn’t be advisable.
If you have enough disposable income each month to clear the debts yourself, you should do.
What lenders allow debt consolidation remortgages?
Not all lenders like debt consolidation and that is our job to find the right lender for you, be it a High street Bank or a Specialist lender, and even if a remortgage isn’t possible, there are still other debt consolidation options in the form of a secured loan or maybe an unsecured loan.
What debt consolidation options are there available to me?
When considering paying off debt with a remortgage you should firstly explore all the options you have available such as:
Unsecured Loan – Typically unsecured loans are up to £25,000 and over a 5 year term. As this is unsecured you are not risking your home. Many high street lenders offer these and there are also online providers worth considering.
Further Advance – You should speak to your existing lender and see if they offer further advances (additional mortgages) on the property.
Secured Loan – You may have a mortgage in place on a fixed rate or really good terms, so a debt consolidation remortgage would incur redemption fees or not be ideal, so maybe a secured loan would be more suitable, you would avoid paying the redemption fees and be able to keep the main mortgage terms in place. Debt consolidation Secured loans are also known as second charge mortgages.
Remortgage – You could potentially remortgage your property with the existing lender or a new lender and consolidate the debt.
You should work with a mortgage broker and explore all these options. Take your time to clearly price it all out and make sure you are fully informed of all the pros and cons to make the right decision when consolidating debt with a mortgage or remortgage.
What other debt solutions are available?
As well as the debt consolidation options mentioned above, you could also consider:
Debt Management Plan (DMP) – This is an informal agreement where you agree to pay your debts £XX per month. Typically the interest rate is frozen. You could arrange this yourself or use a 3rd party. If using a 3rd party make sure they are FCA authorised.
Individual Voluntary Arrangement (IVA) – An insolvency practitioner will set up a formal agreement where you will agree to pay all or part of your debts over a period of time. Be aware that by having an IVA in place it may hinder your chances of getting an IVA Mortgage.
Step Change, which is a debt charity, are able to provide you with free advice to help with debt problems.
Remortgage for debt consolidation with bad credit – Is this possible?
There are specialist lenders which you can access through mortgage brokers, who are able to provide mortgages and secured loans to clients that have bad credit registered. Bad credit in the form of missed payments, defaults, mortgage arrears or county court judgements will be considered. If you have had a mortgage declined, there still maybe options available and it is advisable to work with an experienced mortgage broker.
Is it possible to get a debt consolidation remortgage if I don’t have a mortgage?
As you own your home outright, you would therefore take out a new mortgage to pay off your debts. As previously stated, this is a big decision to make, so please get good advice and review all your debt consolidation options.
Will a debt consolidation remortgage affect my credit score?
If you have high levels of unsecured debt, such as credit cards &/or loans this will reduce your
credit score, so consolidating debt with a mortgage may help improve your score overall, however it is worth noting that this can take time. As with any form of debt consolidation there are pros and cons as explained earlier to consider.
How do I get debt consolidation remortgage advice?
The advisers at The Money Hub would be happy to take the time to explore your options and give you advice. You can get in touch with us by completing the above enquiry form or calling the office. It is always worth obtaining a copy of your credit report from Experian, Equifax or Check My File prior to the call.
Getting good advice around consolidating debt is important. There are advantages to debt consolidating with a remortgage, but it is important you also know the disadvantages. The advisers at The Money Hub could help you with this. You arrange a standard residential mortgage for your new purchase.
This really depends upon your circumstances. Debt consolidating with a mortgage is one option, however you should also consider an unsecured loan, secured loan or may be a Debt Management Plan. It is important to explore all your options and get advice to make sure you take the right decision.
There are specialist lenders that will help clients who have a low credit score &/or bad credit registered such as missed payments, mortgage arrears, defaults &/or County Court Judgements. These specialist lenders generally offer their mortgages through brokers.