Meera Lumb and Sam Hill explain how debt consolidation remortgage works.
What is debt consolidation remortgage?
A consolidation remortgage is simply the process of switching existing borrowing, such as credit cards or personal loans into one simple loan, in the form of a mortgage. Basically you’ve only got one payment, which helps tidy up direct debits and can potentially save you interest.
Is consolidating a good idea?
People may want to consolidate debt for a number of reasons, from simply reducing their monthly payments or benefiting from a lower interest rate, so lenders would generally support this provided it’s justifiable and affordable. There is certainly strict criteria around debt consolidation, however, and it’s dependent on an individual’s circumstances.
It’s very important to get advice in this area because you would be consolidating an unsecured credit card onto a secured form of borrowing against your home. You could also potentially end up paying more interest over time, so for some clients it will be beneficial to keep the debts as they are.
Affordability of the mortgage is key, so when you approach a mortgage broker to consider what kind of maximum amount you can raise, the mortgage still has to be affordable from the lender’s point of view. They would therefore look at your personal circumstances such as income, expenditure, and credit history.
What is the process here and what documents do I need?
The first thing to do would be to seek advice. Speak to a broker to make sure that you’re getting sound advice regarding it. You could also go directly to your existing lender if you’ve got a mortgage. They will have brokers that will be able to help.
Things to bear in mind are that all individual circumstances are different from another. The process would be speaking to a broker, who would assess how much you owe at that point in time and then whether you would be able to afford to increase that loan.
After they’ve done the affordability assessment they’ll need your last three payslips or your last two year’s self-assessment tax calculations if you’re Self-Employed. Other documents you may need are details of the debts that you’re looking to consolidate, such as a statement for your credit card showing how much you owe, who you owe it to and what sort of interest rate is on the agreement. This is to make sure that it’s worth doing and that you are going to see a saving from doing it.
The other documents you’ll need will be similar to when you took your mortgage out, such as your passport, last three months bank statements, P60s or other proof of address, such as a council tax or utilities bill.
What is the difference between debt relief and debt consolidation?
Debt consolidation and debt relief both help you reduce your debt, but they do it in different ways. Debt relief is helpful in cutting your actual total debt owed whereas debt consolidation is useful for cutting the total number of creditors that you owe with only one monthly interest rate and one monthly payment.
With debt relief you potentially negotiate with the credit card or loan company so that you can pay a lower amount than what you owe. In this situation your home isn’t impacted because it’s still unsecured debt.
If you were to take a Debt Relief Order, it could potentially have an impact on your ability to seek credit in the future. You also have to have less than £2000 worth of assets to be eligible and the debts have to be less than £30,000.
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Can you remortgage with credit card debt?
You can remortgage with credit card debt, it depends on each individual situation and you’d have to be eligible for the remortgage in terms of affordability.
Can you consolidate debt twice?
It is possible to consolidate twice, however, based on individual circumstances. Lenders are not always willing to lend if there’s been a consolidation before as this shows there’s a bigger problem with being able to manage your finances. By consolidating twice you are showing the lender that you’re overcommitting yourself, which can mean lenders saying no.
On the other hand, it could be something completely justifiable and therefore lenders would actually consider lending, so it does depend on the situation and the reason for consolidating.
What debt do mortgage lenders consider?
Within reason, most lenders will consider most debts. The more commonly occurring ones would be credit card debt, personal loans and overdrafts. Car finance and business expenses might be considered, but gambling a lot of lenders steer away from. It will vary from one lender to the next, as each has their own criteria with regards to acceptable debts.
How can a mortgage broker like Yellow Brick Mortgages help if somebody is looking to remortgage for debt consolidation?
A mortgage broker can fully understand the client’s circumstances and help you understand the criteria that lenders work with on a day-to-day basis. If you’re thinking about remortgaging to consolidate debt we’d be happy to help with that. As well as our existing knowledge we get updates from lenders regarding criteria. We also support and help through the process to completion. Being able to speak to the underwriters throughout the process helps because we can paint a picture to the underwriter as to exactly what the situation is.
If you’re looking to potentially remortgage to consolidate your debts, we’d be happy to help.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.