Is a Debt Consolidation Right for Me?
Time to remove the stress and get support to finally consolidate those monthly outgoings into just one payment. Please do not worry! debt consolidation through a mortgage is quite normal, and The Mortgage Broker offers all the support and help you need to do this.
Debt consolidation enables you to combine all your debt into one more manageable loan. This will allow you to make one payment per month, meaning less hassle, less stress and most of all, just one interest payment.
- All debts into one payment
- Reduce monthly outgoings
- Raise additional cash
- Secure a better mortgage deal
What Is a Debt Consolidation Mortgage?
Do you have outstanding loans, credit cards or other debts you need to pay each month?
Having debt can be extremely stressful at the best of times and when you have multiple payments to make every month it can be difficult to manage your finances, which can start to feel overwhelming.
A mortgage for debt consolidation is a way to use the equity in your home to pay off your other debts, leaving you with one monthly payment to make instead of several.
So, is a debt consolidation mortgage the right move for you? Let’s look at the pros and cons and give you the information you need to decide.
How Does a Debt Consolidation Mortgage Work?
As the name suggests, a debt consolidation mortgage allows you to consolidate your existing debts, such as personal loans, credit cards, bank overdrafts, etc. into one manageable payment.
Essentially, you borrow money against the equity in your home (The difference between your mortgage balance and the value of your property/home), the outstanding balances on your credit cards or loan debts are paid off and those balances are added to your mortgage instead.
This results in one monthly payment for you to make instead of several, making your finances more manageable.
Why Use A Mortgage Broker?
Get access to industry leading rates in minutes, along with receiving trusted, independent, award winning advice.
Access to Best Mortgage Rates
Some mortgage rates and products are only accessible through a broker.
Search & Compare UK Market
Search 96+ lenders and 12,000+ rates in minutes, finding what's right for you.
Free, No Obligation Advice
There is no cost for advice, searching, comparing rates or a mortgage in principle.
How Do Lenders Assess You for a Debt Consolidation Mortgage?
Lenders will look at several things when considering your application, including:
- The amount of outstanding debt you have
Mortgage lenders will look for a good debt-to-income ratio (DTI). The exact balance will vary lender to lender but typically your debt payments shouldn’t exceed about 36% of your income. A ratio in excess of 45% or 50% may be considered too high.
- Your credit score
Your potential lender will examine your credit report. Every mortgage lender has different requirements with regards to your credit score, but generally the better your credit the better your chances (and the better terms you can get).
Some lenders may require a credit score of 700 or better, but some lenders will consider you for a debt consolidation mortgage or loan even if you have a lower credit score.
- Your income
This will be in relation to your mortgage amount and expenditure generally. Lenders are looking for a good income to expenditure ratio and most importantly to see that you can manage your finances well.
- How secure your income is
How reliable and regular is your income? A regular salary payment is desirable but don’t despair if you are a freelancer or self-employed as there are still lenders who will be willing to offer you a debt consolidation mortgage.
- Your property value
What is your home worth? Has it increased in value since you bought it? A lender will take these things into account when assessing your financial health.
- The amount of equity you have in your home
This is the amount of your property that you own, calculated by taking the value of your property minus the mortgage balance owed. For example:
You owe £250,000 on your mortgage
Your property is valued at £350,000
You equity amount = £100,000
When you have equity in your home you have the option to borrow against it which can be done in a variety of ways. If you are considering borrowing more on your mortgage for debt consolidation, talking to an independent mortgage broker can help you navigate your options.
What’s the Difference Between a Debt Consolidation Loan and a Debt Consolidation Mortgage?
The principal differences are:
Debt consolidation loan
This type of loan is usually (though not always) unsecured.
A debt consolidation loan is similar to a personal loan but taken out with the purpose of clearing your existing debts.
You borrow a specific amount in order to consolidate your other debts such as credit cards, loans, overdrafts etc. into a single loan payment that you make each month. The instalments are usually over a fixed term.
Debt consolidation mortgage
A debt consolidation mortgage differs from a debt consolidation loan in that it is secured against the equity in your home.
However a debt consolidation mortgage is similar to a debt consolidation loan in that the primary objective is to clear some debts and simplify your financial outgoings, so instead of making multiple payments to different lenders you have just one payment to make to a single lender.
You also have the option of repaying the loan over a longer time period than with a fixed-term loan
Does a Debt Consolidation Loan Affect Getting a Mortgage?
As a general rule, consolidating your debts shouldn’t affect your ability to get a mortgage and it may even improve your chances.
Lenders will evaluate your overall financial situation, your debt-to-income ratio, your creditworthiness, missed payments, etc when making decisions regarding a mortgage application.
There are pros and cons to debt consolidation but it is not necessarily viewed as a negative thing by lenders.
The most important thing is to not miss payments as that will negatively affect your credit score and call into question your ability to meet your mortgage payments.
What Are the Pros and Cons of a Debt Consolidation Mortgage?
There are some advantages and disadvantages as we can see:
When you consolidate several payments to multiple lenders into one monthly payment to a single lender you simplify your debts. It can be a great weight off your mind to know that you only have a single payment to worry about. Many people find it more manageable and less stressful. When you only have a single debt payment to make you may find it much easier to budget your money. Usually, when you consolidate debts into a mortgage you will end up with a lower interest rate than you had with your unsecured loans and credit card debts Pros
Essentially you will be adding your existing debt onto your mortgage. This will have implications on your mortgage and will effectively reduce the equity in your home. An important consideration. If the increased debt causes you to miss mortgage payments this could put your home at risk. It’s important to always make your mortgage payments on time. Although (as noted above in the ‘pros’) your debt consolidation mortgage rate should be superior compared to your unsecured loans, you may end up paying back more in interest over the long term. Cons
Can You Use a Second Mortgage for Debt Consolidation?
One of the great advantages of a second mortgage is that it offers a great deal of flexibility in how you can use the funds. While many types of loans will specify what you use the funds for, the money from a second mortgage can be used for just about anything, making it a popular option for many people.
Although there are few restrictions on how you spend the money from a second mortgage, the most common usage is for debt consolidation. Using a second mortgage to pay off debts can be a great way to get your borrowing under control.
By repaying and consolidating existing debts you can also improve your credit score, making future borrowing easier.
How Does a Second Mortgage for Debt Consolidation Work?
A second mortgage is in essence a loan taken out using the equity in your home as security (same as with a first mortgage). There are some key differences though which we’ll explore.
With a first mortgage you use your home as collateral and in the event of you failing to meet the mortgage payments the lender can assume control of your home.
If you take out a second mortgage then the loan is secured against the amount of equity in your property that you have already paid off. If you have paid off a large amount of your mortgage, or maybe your house value has increased, then you have more equity, which strengthens your position when negotiating a second mortgage. If you default on your payments the collateral is the part of your property that you own (for example maybe 25%).
It’s worth noting that the first charge mortgage lender has precedence in the case of a default. Debt consolidation mortgage lenders will take these considerations into account and this will affect the costs associated with the second mortgage.
Do You Have To Take Out Your Second Mortgage With Your Current Lender?
No, you don’t have to remortgage with your existing lender – you are free to go with a different lender.
It’s advisable to compare rates and terms in order to secure the best deal to suit your circumstances.
How Does Debt Consolidation Affect Your Mortgage?
There are pros and cons. A refinance mortgage for debt consolidation can increase your loan to value rate (LTV). Your financial situation may become more stable and lenders will view that as a positive. If you extend the duration of your mortgage you will potentially end up paying more interest over time. However mortgage interest may be tax-deductible, unlike credit card debt for example. As there are many implications to consider, it is a good idea to consult with a professional mortgage broker about debt consolidation to carefully weigh your options.
Is a Second Mortgage for Debt Consolidation Right for You?
If you are considering taking out a second mortgage to consolidate your debts then the best first step is to consult with a mortgage professional.
Here at The Mortgage Broker our expert team has years of experience in all aspects of mortgages. We know the best debt consolidation mortgage lenders and will be able to advise and guide you through your options and help you in getting the best deal.
Can You Get a Debt Consolidation Mortgage if You Have Bad Credit?
You should still be able to get a bad credit debt consolidation mortgage although you may end up with higher fees and interest rates.
Generally speaking, the better your credit score, the lower your rates and fees will be, so it’s a good idea to view your credit file before you make your application and try to improve your credit score if possible.
Find Out If a Debt Consolidation Mortgage is Best For You
Lock in the rate you need today - no impact on your credit score.
Request a callback
Will a Debt Consolidation Mortgage Negatively Affect Your Credit?
Your credit score may take a temporarily dip when you consolidate debts, but it should improve over time if you:
- Always make your payments on time
This is very important as your home could be at risk if you default on your mortgage payments.
- Keep your current credit lines open
Consolidating credit card debt for example just means that you clear the balance – there is no need to close your accounts, in fact closing your credit lines may worsen your credit score.
- Avoid taking out any more debt
Further borrowing can negatively impact your credit and may affect your ability to make your mortgage payments if you overstretch your financial commitments.
Summary
A debt consolidation mortgage is a type of refinancing using the equity in your home to pay off other debts you may have such as credit cards or personal loans.
There are advantages and drawbacks to this option including; making your finances easier to manage by combining your borrowing into one payment, but on the downside you may end up paying more over time due to an extended mortgage period. The main consideration is that your home may be at risk if you default on your mortgage payments.
For professional, free advice, please contact us and our friendly team will be happy to provide you with personalised, expert advice.