Remortgage To Consolidate Debt

As of July 2023, the average personal debt per household in the UK is £65,661.

So, if you are having difficulty managing your finances, a remortgage to consolidate debt may be a helpful option.

It is a strategic way of dealing with the complexities of managing various payments while allowing you to make use of the equity in your property. And by doing so, you will be able to free up funds to be used to repay existing loans quickly. 

Let’s explore these remortgages and find out how you can benefit from them while learning about the application process.

What Is a Remortgage To Consolidate Debt?

Remortgaging for debt consolidation purposes is a financial strategy that merges your debts into a single comprehensive payment. 

Debt consolidation leverages the equity that you have built thus far in your property but it requires that you are a homeowner and not a first-time buyer.

You can combine nearly most types of unpaid debt into your existing mortgage, which includes but is not limited to the following.

• Credit card payments
• Loans
• Store cards
• Overdrafts
• Hire purchase agreements
• Student finance

A debt consolidation remortgage may help reduce your monthly repayments in the short term by merging all your monthly debt repayments into one payment. 

In a typical remortgage, you will be switching both lenders and mortgage products, which may require you to release the equity in your property. 

The value of the remortgage will depend on the following factors:

• Property value
• Your equity
• Your credit file
• Borrowing amount

How To Get A Debt Consolidation Remortgage

When searching for remortgage options on the market, it’s important that you look for the best mortgage products available to you across the market. 

This is important as this can help with your overall savings from consolidating your debts into your mortgage. 

Here’s what you should do while getting a remortgage to consolidate debts.

1. Gauge Affordability

Firstly, assess whether your financial situation allows for a remortgage or not. 

Begin by assessing all the unpaid debts, current equity, the possibilities of repayment and whether you will be able to pay the required monthly amount. .

You can also calculate your Loan-To-Value (LTV) ratio to determine the amount of equity that you will be able to release. This knowledge will also help you find better remortgage deals on the market.

2. Enlist The Services Of An Advisor

Hiring a mortgage advisor saves you from having to make decisions blindly, as they can provide you with valuable insights into the available options. Their advice will be tailored to your personal and financial situation, which allows them to consider all options and to make sure a remortgage is the best option for your circumstances.

3. Get Started With The Application Process

Now that you have evaluated the affordability and asked an expert for advice, you can begin the application process. 

The application process can vary based on the lender, but you can expect them to perform a few rudimentary checks. These checks can include your finances, credit history, previous home ownership, employment status, and more.

Be sure to ask the lender about the eligibility criteria before applying so that you can be well-prepared for the application process.

Benefits Of Debt Consolidation Remortgages

If you are on the fence about opting for a debt consolidation remortgage, there are three main benefits that may change your stance. Let’s explore them briefly.

1. Fewer Payments To Manage

With a debt consolidation mortgage, you will have fewer payments to manage simultaneously. 

This simplifies your finances significantly, making it so that you only need to make a single payment every month to one creditor: the mortgage lender.

2. Reduced Monthly Payments

A debt consolidation mortgage can also minimise the amount of money you spend to repay various debts every month. 

The money raised from remortgaging can be used to repay some or all of your existing debts, which results in plenty of saved funds.

3. Lower Interest Rates

Lastly, you may have access to lower interest rates than unsecured debt, which adds up in the long run. 

By saving on interest payments, you will be able to reinvest funds and take care of monthly expenses more efficiently.

Disadvantages Of Debt Consolidation Remortgages

With the advantages in mind, it’s important to remember that debt consolidation remortgages don’t come without any risks. 

Before you choose a remortgage option, consider the three risks described below.

1. Risk Of Repossession

If a financial emergency prevents you from paying the monthly dues, the mortgage lenders might repossess your home to cover their losses. 

Remortgaging puts your home directly at risk, which can be nerve-wracking if your financial situation is not in order.

2. Various Fees And Charges

Remortgaging involves a myriad of fees and charges that can lighten your wallet quite significantly. Fees, taxes and charges must all be accounted for when considering a debt consolidation remortgage.

3. Reduced Mortgage Options 

The number of mortgaging options available to you can decrease as your equity share shrinks. This may lead to higher interest rates depending on the Loan-to-Value after consolidating your debts. 

Debt Consolidation Remortgage Assessment Factors

The main factors that lenders use to assess your debt consolidation remortgage application include your Loan-To-Value ratio, credit history, age and property type.

Perhaps the most important factor of them all, the LTV ratio can be the deciding factor for a lender when they assess your application. Some lenders may limit the amount of loan you can take out compared to the property value to around 85% for debt consolidation.

Next, credit history reflects whether you have been making your monthly payments on time or not. A healthy credit file improves your chances of getting a good deal.

As for the age, if you are above a certain age threshold, the chances of a lender offering you a remortgage are low. Most lenders will consider employed customers up to the age of 70 or their chosen retirement age, whichever is lower. This is worth keeping in mind as this could affect affordability and make it more difficult to consolidate all of your debts into your mortgage. 

Lastly, the property type plays an important role in determining whether the lender will accept your application or not. If your home is a non-standard construction featuring a timber frame, thatched roof or is a listed building, the lenders available to you may decrease.

FAQs

1. Will consolidating my debts affect my credit score?

Debt consolidation mortgages can cause a small dip in your credit score while the lender performs the required checks during the application process. But in the long run, your credit score should improve after this slight dip providing you keep up with your monthly repayments moving forward.

2. What are the other options for debt consolidation?

There are a few alternatives to debt consolidation remortgages, which include a further advance, personal loans, secured loans, and more. 

A further advance is when you borrow more money from the current mortgage lender. It can be a good option if you are tied into a fixed rate as this will avoid any early repayment charges you could incur by remortgaging within a fixed rate period.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.