Remortgaging for Debt Consolidation
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What is a consolidation remortgage?
The consolidation remortgage is a mortgage where you’re consolidating debt outside the actual principal mortgage – it might be credit card debt, debt to family, a bank loan or personal loan, car finance or something of that nature.
The main idea behind a consolidation mortgage is to reduce someone’s monthly commitments and bring it all into one monthly payment. It tends to be an exercise to manage a monthly budget that has potentially become too expensive or out of control.
Is consolidating a good idea?
It very much depends on your personal situation. We see a lot of people with credit card debts that are getting out of control but they assume these will be disregarded as they are ‘interest-free’. However, when you’re applying for a mortgage, lenders look at the overall balance, not what you’re paying each month.
Remember that the minimum monthly payment on a credit card is pretty much just the interest. You’re not actually reducing your debt and in fact are prolonging the period over which interest is being charged. If you move it from one card provider to another, eventually you’re going to run out of card providers and end up with a really bad deal.
But by consolidating the debt you can start actually paying it off. You put the debt onto your home and most mortgages these days are capital repayment, so with every monthly payment you make, you are reducing the overall outstanding balance. That’s something that you may not have been able to do with your credit card.
Whether this is a solution or something we can recommend, will very much depend on the individual and their circumstances. This is your home, at the end of the day. It’s not a decision that should be taken lightly, but for a lot of people it’s a way to pull yourself out of a difficult situation.Your adviser will discuss your options and ensure you understand the implication before a recommendation can be made.
We try to make sure that people only do this exercise once in their ‘mortgage career’. Consolidation is basically taking short term debt and turning it into a long-term mortgage commitment over a couple of decades or so (term will depend on needs and circumstances as well as lender requirements). It has its place for those that are really in need, but it’s not to be done lightly either.
Part of our job as mortgage brokers is to exercise a high level of customer care. So we treat people with debt issues as vulnerable clients, especially considering the mental health issues that can sometimes arise around debt management. We have a duty of care to ensure everyone achieves a good outcome and our advisers make sure that people really understand the pitfalls of debt consolidation – alternatives will be discussed and considered before making a recommendation.
What’s the process for remortgaging for debt consolidation? What documents do I need?
It’s similar to what you would expect if you were looking at purchasing a property or doing a straightforward remortgage. Lenders will likely want the latest three months’ payslips and bank statements to evidence income and expenditure. If you’re self-employed, there could be different requirements depending on how your company is structured. Speak to an adviser for help to understand document requirements.
Lenders will look at your overall affordability to make sure you can afford not just your existing mortgage but the debt that you’re seeking to add on and secure against your home’s value has to allow for the increased borrowing as well. They may ask whether debt consolidation is something that you have done before.
It’s important to keep an eye on your overall credit profile. Since Covid, lenders are asking more questions and are stricter on what they will and won’t lend on. It’s best to be informed from day one and consider carefully your reasoning, options and repayment strategy when you apply for short term borrowing.
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What is the difference between debt relief and debt consolidation?
Debt relief is a service provided by a third party other than a lender. If people find themselves in a situation where they can’t meet their minimum payments as well as a mortgage payment or rent, they can seek debt relief. This is often handled by charities such as Step Change. They advise borrowers on their options if they can’t meet their minimum payments.
Rather than letting a credit arrangement go into default or get a County Court Judgment, which seriously impacts your credit rating. These debt relief companies encourage the borrower to liaise with the credit company in order to reach an agreement. Often that arrangement is over a short-term period, maybe six or 12 months, where a more affordable minimum payment is agreed upon and met on a monthly basis to show commitment until the individual is in a better financial position. Always discuss the effect of such arrangements on the overall debt with the company handling your case.
Consolidation on the other hand, is adding your debt onto a mortgage account and repaying it over a longer period. We’re recording this in December 2022 in a period of higher interest rates compared to the last 10 or 12 years. Credit card rates are somewhere around 21% after any interest-free period.
So consolidation works quite well in that a static debt on a credit card is coming down and an immediate reduction of monthly costs can be achieved. But the flip side of that is that it’s taking longer to repay. So what you may save in the initial interest rate, you may lose over the term of your mortgage. Consolidation is therefore more about managing your monthly budget and making changes to handle your finances.
With debt relief, you’re parking your debt for another day in the hope that the situation gets better. With debt consolidation you’re turning a short-term debt into a longer-term one. With debt relief you need to be careful as to the type of arrangement you end up going into. It could still cause an adverse reaction on your credit profile. Individual voluntary agreements and debt relief orders do show up on credit reports and they can stay there for six years, even after the debt is repaid.
We’ve had instances in the past where people are paying £2,000 a month on credit cards and personal loans and £1,000 on their mortgage. We’ve been able to secure that debt and reduce the total monthly payment to £1500 – so we’ve halved it. The ideal approach is to then put £500 a month into an overpayment to reduce down what’s been added onto the mortgage.
Mortgage overpayment facilities will be discussed with your adviser where a debt consolidation recommendation is made.
Can you remortgage with credit card debt?
Yes, you can remortgage with credit card debt. You utilise the mortgage to pay it off. It’s probably the most common reason people consolidate, because credit cards are so easy to get and so easy to spend on. It’s very easy to spiral out of control. If you find yourself in this situation, you aren’t alone – it’s a very typical situation, especially at the moment with the cost of living crisis.
If you are struggling with debt, you can discuss alternative options by contacting the Money Advice Service.
What other types of debt do lenders consider?
Most debt can be consolidated depending on individual circumstances. One or two types are however viewed slightly differently by lenders – gambling debt is a pretty difficult one for us to place. If we come across that type of problem it’s usually very obvious, with multiple small transactions going through apps or bank accounts and we and the lender will spot that. Gambling debts are difficult because there’s a whole issue around vulnerability and getting help for people in that scenario.
Some lenders won’t do consolidation for business debt. Some will, so that’s a reason to speak to a broker who can navigate the options. Some lenders won’t remortgage to consolidate tax debt – again, some will. We can do the research for you and explore options that may be available to you.
Can you consolidate debt twice?
The short answer is that yes, you can consolidate for a second time. There’s evidence that an individual who consolidates debt onto their mortgage is very likely to need to do it again within a five year period. That’s a fairly historical analysis looking over the last ten years or so.
In the current climate, at the end of 2022, lenders are becoming stricter with all mortgages whether it be for a purchase, a high loan-to-value first time buyer or a debt consolidation remortgage. The due diligence lenders are doing right now is high compared to the last 10-15 years. Placing a debt consolidation mortgage for the second time right now could be more tricky than it was perhaps six months ago. Your adviser will discuss the overall suitability of remortgage to consolidate debt and will explore other options before making a recommendation.
What other advice do you have on debt consolidation?
As we said earlier, debt consolidation does have its place. It can make a radical difference to a family’s monthly budget where the cost of servicing credit has been a problem. We are very well versed at Mortgage Marketplace at guiding people through the pitfalls of consolidation, avoiding a second consolidation and creating extra budget to reduce the debt quicker.
So don’t struggle with debt and get into more debt. That’s the message we would give people, because there are solutions to help. Families are really feeling it right now.
If you’re struggling with debt don’t shy away from it. Talk to a broker, talk to Citizens Advice or Step Change and seek the assistance that’s out there.
You may have to pay an early repayment charge to your existing lender if you remortgage early.
If you are struggling with debt, you can discuss alternative options by contacting the Money Advice Service. Adding unsecured debts to your mortgage may place your home at risk and may result in more interest being paid overall.
YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOANS SECURED ON IT.
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