Remortgage to Consolidate Debt

How Does a Debt Consolidation Remortgage Work?

A debt consolidation remortgage works by increasing your mortgage borrowing to raise enough capital to pay off your existing debts. Instead of making multiple payments to different creditors each month, you make a single mortgage payment that covers everything.

The process typically works as follows:

• Assess your total debts — Add up everything you owe across credit cards, personal loans, store cards, car finance, and any other outstanding balances. This gives you a clear picture of how much additional borrowing you need.
• Check your available equity — Your lender will need to value your property and confirm that you have sufficient equity to cover the additional borrowing. Most lenders will want to keep your loan-to-value (LTV) ratio below 85-90%.
• Apply for a remortgage — You apply to either your existing lender or a new lender for a mortgage that is large enough to cover your current mortgage balance plus the debts you wish to consolidate.
• Debts are cleared on completion — When the remortgage completes, the additional funds are used to pay off your creditors directly. Some lenders insist on paying creditors themselves to ensure the debts are actually cleared.

It is worth noting that your new mortgage payment will be higher than your previous one because you are borrowing more. However, the combined total of your new mortgage payment should be lower than what you were paying across all your debts before consolidation.

For example, if you currently pay 800 pounds per month on your mortgage and 600 pounds per month across various debts, your new consolidated mortgage payment might be around 1,050 pounds per month. That represents a saving of 350 pounds each month, which can make a real difference to your household budget.

What Types of Debt Can You Consolidate?

Most types of unsecured debt can be consolidated into your mortgage. The most common debts that homeowners look to consolidate include:

Credit card balances

Credit cards typically charge interest rates of 18-30% APR or even higher. Rolling these balances into your mortgage at a rate of perhaps 4-6% can result in significant interest savings. If you are carrying balances across multiple credit cards, the monthly savings can be substantial.

Personal loans

Unsecured personal loans usually charge rates of 6-15% depending on the amount borrowed and your credit profile. Consolidating these into a mortgage rate can lower your monthly outgoings considerably.

Store cards

Store cards are among the most expensive forms of borrowing, with interest rates frequently exceeding 30% APR. Clearing these through a remortgage can save you a significant amount in interest charges.

Car finance

Depending on the type of car finance agreement you have, it may be possible to include this in your debt consolidation. Hire purchase agreements and personal loans used to buy vehicles can often be consolidated, though PCP agreements may have different considerations.

Overdrafts

If you regularly rely on an arranged or unarranged overdraft, consolidating this into your mortgage can help break the cycle and reduce the charges you face.

It is important to be aware that while consolidating these debts can lower your monthly payments, you will be repaying them over a much longer period. This means you could end up paying more in total interest over the life of the mortgage, even though the monthly cost is lower. A qualified mortgage adviser can help you weigh up the costs and benefits for your specific situation.

Eligibility and Lender Criteria for Debt Consolidation Remortgages

Lenders will assess your application for a debt consolidation remortgage carefully. While criteria vary between providers, there are several common factors that most lenders consider:

Sufficient equity

You need enough equity in your property to cover the additional borrowing. Most lenders cap debt consolidation remortgages at around 85% LTV, though some specialist lenders may go higher. If your property is worth 300,000 pounds and you owe 180,000 pounds on your current mortgage, you have 120,000 pounds of equity and could potentially borrow up to 75,000 pounds for debt consolidation while remaining within the 85% LTV threshold.

Affordability assessment

Under FCA regulations, all mortgage lenders must carry out a thorough affordability assessment. They will look at your income, regular outgoings, and financial commitments to ensure you can comfortably afford the new mortgage payments. The fact that your monthly outgoings will reduce after consolidation is usually taken into account.

Credit history

Your credit history plays an important role. While having debt does not automatically disqualify you, lenders will want to see that you have been managing your finances responsibly. Late payments, defaults, or county court judgements (CCJs) may limit your options but will not necessarily prevent you from consolidating.

Income verification

Lenders will require proof of your income. If you are employed, this usually means recent payslips and possibly your P60. If you are self-employed, you will typically need two to three years of accounts or tax calculations from HMRC.

Reason for debt

Some lenders may ask why you have accumulated the debts you wish to consolidate. A clear explanation, whether it relates to a period of reduced income, unexpected expenses, or home improvements, can help reassure the lender that you are not simply overspending without a plan.

If you have been declined by a mainstream lender, specialist mortgage brokers can often find solutions through lenders who take a more flexible approach to debt consolidation applications.

Advantages and Risks of Consolidating Debt Into Your Mortgage

Before proceeding with a debt consolidation remortgage, it is essential to understand both the potential benefits and the risks involved.

Advantages

• Lower monthly payments — By spreading your debts over a longer repayment period at a lower interest rate, your monthly outgoings should reduce. This can provide immediate relief to your household budget.
• Simplified finances — Instead of managing multiple payments to different creditors on different dates, you have one single payment to make each month. This makes budgeting easier and reduces the risk of missed payments.
• Lower interest rate — Mortgage rates are typically much lower than the rates charged on credit cards, store cards, and personal loans. This means less of your monthly payment goes towards interest and more goes towards reducing the debt.
• Improved cash flow — The reduction in monthly outgoings can free up money for other priorities, whether that is building a savings buffer, covering day-to-day expenses, or investing in your property.
• Potential credit score improvement — Clearing multiple credit accounts and maintaining a single, well-managed mortgage payment can gradually improve your credit score over time.

Risks to consider

• Higher total cost — Although your monthly payments are lower, spreading the debt over 20 or 25 years means you will likely pay more in total interest than if you had cleared the debts over their original, shorter terms.
• Secured against your home — Unsecured debts like credit cards and personal loans are not directly tied to your property. Once consolidated into your mortgage, they become secured debt. If you fail to keep up with your mortgage payments, your home is at risk of repossession.
• Temptation to re-borrow — Once your credit cards and loans are cleared, it can be tempting to start using them again. This could leave you in a worse position than before, with both a larger mortgage and new unsecured debts.
• Early repayment charges — If your current mortgage deal has early repayment charges (ERCs), the cost of leaving early could reduce or even eliminate the savings you would make by consolidating.

It is crucial to get professional advice before consolidating debt into your mortgage. A qualified mortgage adviser regulated by the FCA can help you calculate whether the long-term costs outweigh the short-term benefits and explore alternative options if consolidation is not the right choice.

Alternatives to Debt Consolidation Remortgages

A debt consolidation remortgage is not the only option available to you. Depending on your circumstances, one of the following alternatives might be more suitable:

Debt consolidation loan

An unsecured personal loan used to consolidate your debts keeps them separate from your mortgage. You pay a higher interest rate than a mortgage, but the loan is repaid over a much shorter period (typically three to five years), which usually means you pay less interest overall. Your home is not at risk if you cannot keep up with payments.

Balance transfer credit cards

If your debts are primarily on credit cards, transferring balances to a 0% interest credit card can be an effective short-term solution. You will need a reasonable credit score to qualify, and you must be disciplined about paying off the balance before the promotional period ends.

Further advance from your existing lender

Your current mortgage lender may offer a further advance, which allows you to borrow additional funds on top of your existing mortgage without switching to a new deal. This can sometimes be arranged more quickly and with lower fees than a full remortgage.

Secured loan (second charge mortgage)

A secured loan sits behind your first mortgage and uses your property as collateral. Rates are higher than a first charge mortgage but lower than most unsecured borrowing. This option does not disturb your existing mortgage, which can be beneficial if you are on a competitive rate with early repayment charges.

Debt management plan

If your debts are causing serious financial difficulties, a debt management plan arranged through a regulated provider could help you negotiate reduced payments with your creditors. Free debt advice is available from organisations such as StepChange, Citizens Advice, and the National Debtline.

Each option has its own set of advantages and considerations. A mortgage broker or financial adviser can help you compare the options and determine which approach best suits your individual circumstances.

Steps to Remortgage for Debt Consolidation

If you have decided that a debt consolidation remortgage is the right option for you, here is a practical step-by-step guide to the process:

Step 1: Get a clear picture of your debts

List all of your outstanding debts, including the balance owed, the interest rate, the monthly payment, and any early settlement figures. This information will be essential when applying and will help your adviser recommend the best approach.

Step 2: Check your credit report

Obtain a copy of your credit report from one of the three main credit reference agencies in the UK: Experian, Equifax, or TransUnion. Review it carefully for any errors and take steps to correct them before applying. Ensure you are registered on the electoral roll, as this can positively affect your credit score.

Step 3: Speak to a mortgage adviser

A whole-of-market mortgage adviser can search across hundreds of deals to find the most suitable option for your circumstances. They will assess your affordability, calculate the potential savings, and advise on whether consolidation is genuinely in your best interest.

Step 4: Gather your documentation

Prepare your proof of identity, proof of address, proof of income, recent bank statements, and details of all debts to be consolidated. Having everything ready speeds up the application process.

Step 5: Submit your application

Your adviser will submit your application to the chosen lender. The lender will carry out their affordability checks, credit checks, and arrange a valuation of your property.

Step 6: Receive your mortgage offer

If your application is approved, the lender will issue a formal mortgage offer. Review this carefully to ensure all the terms are correct and that the amount being raised is sufficient to clear your debts.

Step 7: Legal completion

A solicitor or conveyancer will handle the legal aspects of the remortgage. Once everything is in order, the new mortgage will complete and your existing debts will be paid off. Some lenders pay creditors directly as a condition of the loan.

The entire process typically takes between four and eight weeks, though this can vary depending on the complexity of your application and how quickly you provide the necessary documentation. Throughout the process, your adviser should keep you informed of progress and address any queries you may have.