Debt Consolidation Mortgage

What is a debt consolidation mortgage?

A debt consolidation mortgage is a term used when someone borrows an additional lump sum from the equity in their home to pay off, either in part, or all of their other debts and combine them into one mortgage repayment rather than having several payments to different credit lenders each month.  

As it’s usually the longest type of credit you can apply for, using your mortgage for debt consolidation not only allows you to bring all your debts under one, easy-to-manage repayment spread over a longer loan term but it should also help reduce your overall monthly outgoings. 

Most unsecured debt can be consolidated into a mortgage, such as:

• Personal loans

• Hire purchase agreements

• Credit cards and Store cards

• Overdrafts

• Student loans

Lenders aren't usually willing to accept more specific financial commitments, such as unpaid income tax bills or gambling debts, for mortgage debt consolidation.  

Can you remortgage to pay off debt?

Yes, it’s possible. Remortgaging is quite a popular way to consolidate debt. You can either move onto a cheaper deal, reducing your repayments and freeing up income for your other debts. Or you can release equity in your property and use this lump sum to pay off your other debts all at once. 

Moving onto a cheaper deal could be preferable if you don’t have many other debts, and they’re for relatively small amounts (less than £5,000 combined), with only a short term remaining before being repaid (less than 12 months). 

But if the total outstanding amounts for your other debts are quite high (£5,000-£10,000+) and they still have a long time to go before being fully repaid, remortgaging to release equity in your home and consolidate everything into one mortgage repayment could be a more attractive option.  

Is remortgaging to pay off debt a good idea?

If you’re a homeowner with a mortgage and a healthy amount of equity in your property, getting a remortgage to consolidate debt could have a number of benefits, such as: 

• Spreading the cost. With just one repayment per month spread over a longer term, this should reduce your overall monthly outgoings and leave you with more disposable income. 

• Borrowing higher amounts over a longer term. Most unsecured debts, such as a personal loan, only allow you to borrow up to a maximum of £25,000. If your overall debts are higher than this, and there’s enough equity in your property, remortgaging could give you the opportunity to borrow enough to pay off all of your debts. 

• Easier to budget. Managing your monthly outgoings will be much easier with all your debts consolidated into one mortgage repayment. 

However, there are also some possible drawbacks which need to be taken into account: 

• Paying back more interest overall. While mortgage rates are generally lower than they are for unsecured, shorter-term debts, by consolidating everything into one mortgage loan, you’ll be paying the debt back over a longer period. This means you could pay back more interest in the long term. 

• Increased risk of repossession. Placing all of your unsecured debts onto your mortgage will mean you have less equity in your property. Your home could also be at risk of repossession if you fall behind with your repayments. 

• Charges could be applied. If your current mortgage deal hasn’t reached the end of its term, it’s possible you will have to pay an early repayment charge (ERC) to move it onto another. There may also be new fees applied to your new mortgage deal. 

If you’re still unsure whether remortgaging to pay off debt is a good idea, it’s wise to seek advice from an experienced mortgage broker before approaching a lender. 

Our Mortgage Experts help people arrange remortgages in similar situations all the time. If you make an enquiry, we’ll arrange for a member of our team to get in touch and speak to you in more detail about your specific situation. 

How much can you borrow for a debt consolidation remortgage?

This can vary from lender to lender. Some mortgage lenders could accept remortgages with an overall loan-to-value ratio (LTV) of up to 95%; this includes your current mortgage balance plus the additional amount needed to repay all your other debts. 

Whether the amount you’re able to borrow for your remortgage is enough to cover paying off all of your outstanding unsecured debts will depend on several important factors, including: 

• How much equity you have in your property. First, you’ll need to establish if there’s enough equity in your home. For example, if the total debt you’re looking to consolidate is £50,000 and the available equity in your property is less than this, a remortgage will not be enough for this purpose. 

• The amount of debt. Some mortgage lenders will place a cap on the size of debt they’ll allow you to consolidate. 

• The type of debt you’re looking to consolidate. All unsecured debts can be consolidated by remortgaging. But certain other types of debt, such as gambling debt or an unpaid tax bill, cannot. 

• Income and affordability. A mortgage lender will calculate how much you can borrow using a multiple of your annual income (usually between 4-4.5 times earnings). They will also assess your total outgoings to determine whether the new mortgage repayments are affordable. 

• Your credit history. Mortgage lenders will review your Credit Report before deciding how much you can borrow. If you have a low credit score, this could reduce the number of lenders willing to consider your application and, ultimately, affect your chances of securing the lending you need. 

If all the factors and criteria outlined above seem daunting, don’t worry! This is where we can help. 

Our mortgage experts already have all the knowledge and experience necessary to arrange these types of remortgages, including which mortgage lenders to approach. All you need to do is make an enquiry, and we’ll contact you to get started. 

Can you remortgage to pay off debt with bad credit?

If you’ve had bad credit since applying for your original mortgage, remortgaging to pay off your debt could be a bit more complicated, but it is possible. This will depend on how much the bad credit has affected your credit score, when it happened, and the amount involved. 

Several mortgage lenders (all of which have strong working relationships with us) specialise in helping people with bad credit and assess applications case-by-case. You may have to pay a slightly higher interest rate and accept a lower loan-to-value (LTV). However, this may be worthwhile in the long run if you can consolidate your current debts into one manageable monthly mortgage repayment. 

Before you apply, it’s highly recommended that you download your credit reports and check the information to see if anything is registered that could have had a negative impact on your score. If there are any inaccuracies or outdated information, you can also arrange to have this removed. 

What are the alternatives? 

If remortgaging isn’t a viable option, there are several alternatives available, such as: 

• Applying for an increase in your existing mortgage loan with your current lender to cover the debt amount

• If the unsecured debts are for relatively small amounts, you could consolidate them into one unsecured personal loan

• Use any savings and investments to repay the debt, if available

• If the terms of your existing mortgage deal can’t be broken without paying a hefty fee, you could apply for a second charge mortgage**

**This service is offered by referral to a third party.