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Mortgages for Debt Consolidation

How do debt consolidation mortgages work? Your guide to managing debts with low-interest mortgages and finding the perfect debt consolidation mortgage for your circumstances.

Mortgages for Debt Consolidation

Business finance broker often manages enquiries where clients are considering remortgaging their property to assist with consolidating other debts.

Let's look at why debt consolidation through a mortgage can be a great option, help you pay back your debts over a manageable timeframe, and reduce your overall interest costs.

For personal advice and support with your remortgaging application, contact the Revolution Brokers team on 0330 304 3040 or drop us a message at [email protected].

Do I Need a Debt Consolidation Mortgage?

Consolidating debts is where you take out one, larger loan, and use that to pay back smaller debts.

By taking out a mortgage, or a remortgage, the equity in your property helps act as security against the lending, often achieving much lower interest rates than you would have been offered elsewhere.

Benefits of debt consolidation mortgages include:

  • Flexible way to repay debts such as car loans, hire purchase contracts and personal loans or credit card debt.
  • Removes the pressure from your finances with one regular monthly payment.
  • Simplifies your finances by reducing multiple creditors into one account.
  • Reduces your monthly repayments and thus removes stress from your budgeting.

Whether you have a mortgage-free property and are looking to take out a loan against it to consolidate your debts, or want to remortgage your property to cover the lending you need, we'll refer to the loan as a mortgage for the purposes of this article since the same factors are essential in both situations.

About Your Mortgage
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Based On Your Yearly Income, You May Be Able To Borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

How Do Mortgages for Debt Consolidation Work?

Applying for a debt consolidation mortgage is, in essence, the same as taking out any other kind of mortgage. The process will include:

  • A credit report to look at your financial position.
  • Valuing how much the property is worth.
  • Analysis of existing lending secured against the property.
  • Comparing your income to your borrowing to check that it is affordable.

Many mortgage lenders extending an offer for debt consolidation will ask for a formal document to be signed, which commits you to use the lending to repay your debts.

This means that they can safely regard existing debts on your credit file as no longer being a factor when the mortgage repayments begin.

If you have an excellent interest rate on an existing mortgage and don't want to lose that if current lending rates are higher, you can sometimes take out a second, smaller mortgage without impacting the first one.

That is called a second charge mortgage and means that you have two mortgages, at two different rates, which is always possible if you have sufficient equity in your property.

How Does Debt Consolidation Work With a Mortgage?

lot of the time, this option is chosen because the interest rates are much lower than on unsecured, shorter-term debt, and the payments become more manageable.

Unsecured debt almost always carried a higher interest rate because the lender doesn't have the security of a property to lower their risk exposure.

The type of debts that are usually cheaper to consolidate through a mortgage include things like:

  • Personal or payday loans
  • Credit card or store card debt
  • Bank overdrafts

As an example, let's say you have a current debt of:

  • Credit Card A £5,000 balance charged at 24.5% interest
  • Loan A £10,000 balance charged at 11.5% APR
  • Loan B £7,500 balance charged at 16.95% APR

In total, your debt comes to £22,500, and over the next ten years, you will pay interest of £23,423 (if not repaid sooner) - making the repayment of £22,500 debt an enormous £45,923.

If you decided to take out a ten-year debt consolidation mortgage to repay the £22,500 at an interest rate of 5%, you would repay the debt in the same amount of time, with total repayments slashed from £45,923 to £28,638 - reducing the interest by over £17,000.

Before taking out lending secured against your home, you are invited to contact Revolution Finance on 0330 304 3040, so we can discuss the best mortgage options for you.

What are the Pros and Cons of Debt Consolidation Through a Mortgage?

In some cases, consolidating your debts through a mortgage might not be in your best interests - for example:

  • If you have a very low-interest rate on your existing mortgage, remortgaging at a higher rate would end up costing you more (in this scenario, a second charge mortgage would be more advantageous).
  • It might take you longer to pay back your debts depending on the length of the mortgage term.
  • If you fail to keep up with repayments, your home could be at risk of repossession.

For many people, the pros far outweigh the cons:

  • You avoid serious credit issues such as CCJs or bankruptcy.
  • Your budget becomes simple, fixed and easy to manage.
  • The total interest paid is often significantly reduced.
  • You gain a better rate and terms with the security of your property.

If you are unsure about whether debt consolidation mortgages are the answer to your debt concerns, give us a call, and we'll run through your best options.

Things to bear in mind are:

  • What interest rates you are paying now vs what is available on the market?
  • How long do you need to repay your debts, and therefore what mortgage terms should you be looking for?
  • What will the new monthly repayment be, and how does that compare to your existing outgoings?
  • Will you save money overall by consolidating your debts?
  • Is a mortgage the right option for you, or are other debt consolidation options preferable?
  • Should you apply for a fixed rate or variable tracker mortgage?

What Mortgage Value Can I Borrow Against my Home?

The size of mortgage you can get, depends on lots of criteria, and the individual lender. For example:

  • How much you can afford to pay each month.
  • Your debt to income ratio.
  • The equity in the property.
  • The type and number of debts to be consolidated.

For example, if you have a property with 100% equity, i.e. no mortgage outstanding, a lender might offer you up to a 90% loan-to-value ratio - 90% of the value of the property.

Some lenders will place a limit on how much you can borrow against your home for debt consolidation purposes - often a fixed limitation of, say, £30,000 or £50,000.

In other cases, the lending offer might depend on what debts you have, and the circumstances around them rather than the value of the property itself.

How is a Second Mortgage Different from a Debt Consolidation Mortgage?

If you already have a mortgage, and decide to remortgage to pay off debts, then your existing mortgage is also paid off, and replaced by your new borrowing.

However, a second charge mortgage is a type of secured loan, typically from a different lender than your existing mortgage, which is a second lending facility secured against your property.

That means you have two loan accounts; your primary mortgage and your second mortgage.

Second charge loans are sometimes an excellent option for homeowners who have an attractive rate on their existing mortgage and don't wish to lose this by remortgaging at today's market rates.

Are There Age Restrictions on Mortgaging for Debt Consolidation?

As with any type of mortgage, the terms under which you can borrow depend on the lender, and there is no reason you can't consolidate debts through a mortgage whether you are retired or not.

Lenders will need to know your age, income, and the amount already borrowed against the property before making an offer.

Some lenders put a limit on lending to older applicants of, say, £10,000, whereas others will not restrict their borrowing at all.

Many mortgage providers do have age limits, but it all depends on the duration of the loan term and knowing which specialist lenders to apply to. Some have caps of age 75 or 85, and others have no restrictions whatsoever.

For support with securing mortgage lending for debt consolidation past retirement, give the Revolution team a call, and we will recommend the best products for your requirements.

Which Mortgage Providers will Lend for Debt Consolidation?

Lots of mortgage lenders offer specific debt consolidation mortgages, although the criteria they have will vary significantly between providers. Many mainstream lenders offer debt consolidation lending, including:

  • NatWest
  • Barclays
  • Nationwide
  • Halifax
  • HSBC
  • Accord Mortgages
  • RBS
  • Virgin Money
  • Bluestone

However, you can often secure more competitive rates from niche lenders who negotiate products directly with brokers that are not available on the open market.

Expert Support with Mortgaging for Debt Consolidation

Revolution Brokers works with a vast network of lenders and providers, and as an independent broker has access to the entire market.

This means that we can source specific lending that is suited to your needs, liaise with lenders who offer specialist products outside of the open market and negotiate the most advantageous terms on your behalf.

For tailored support with consolidating debts through mortgage lending, get in touch at [email protected] or give us a call at 0330 304 3040.

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