Consolidating debts into a mortgage against your home equity is one option for those with existing "trapped" equity. Done correctly, it can help organise multiple debts into a single monthly payment. Upsides could include lower interest rates and monthly overhead.
We'll walk through the information you need to determine if debt consolidation makes sense based on your full financial picture. The goal is to lay out the facts and possibilities around this, allowing you to evaluate independently.
Consolidating debts into an existing mortgage is possible for homeowners with equity. This involves refinancing or modifying the mortgage to pay off or fold in debts like credit cards, loans, etc.
Debt consolidation can potentially lower monthly payments by securing a lower interest rate under one payment. While appealing, it also risks your home if repayments aren't managed well. First-time buyers cannot consolidate into a new mortgage - owning a home with equity is required. It is essential to weigh the pros and cons of tapping equity to combine debts vs other repayment options.
In theory, many forms of unsecured consumer debt may be candidates for consolidation into an existing mortgage if the lender allows it. These could potentially include:
Unsecured debts can technically be rolled into a mortgage through refinancing or modification.
Those interested in a debt consolidation mortgage should consider consulting a mortgage broker to review options and your situation. Their expertise can guide on:
Make sure any broker clearly details the benefits and risks of debt consolidation.
For homeowners with a mortgage and sufficient equity, there are generally three main options to consolidate unsecured debts into the mortgage:
A further advance allows homeowners to access additional financing through their existing mortgage lender without refinancing or switching providers. The extra debt gets folded into the original mortgage payments.
However, interest rates are often higher for the advanced amount versus the original loan. Minimum borrowing amounts, typically £5,000 or more, also usually apply. Most lenders cap maximum borrowing at 85% combined loan-to-value. Administrative fees may be charged, too.
Specific eligibility criteria can include:
Remortgaging means switching your existing home loan to a new mortgage lender. Borrowers can refinance for lower interest rates or to tap equity for major expenses like debt consolidation.
In a remortgage, the new, larger mortgage loan pays off your current mortgage. The excess funds get used to consolidate other unsecured debts. Compared to further advances, remortgages may enable bigger borrowing increases.
Despite the name, second-charge mortgages are essentially separate home equity loans that get repaid separately from your existing "first mortgage." They don't replace or modify it.
With your current mortgage being the primary financing charge tied to the home, a second-charge loan uses the available equity as collateral for additional, distinct borrowing.
Second-charge products may use underwriting beyond typical affordability metrics or credit scores and often rely more on the value of equity in the property, making them attractive to borrowers with poor credit scores.
Yes, is the short answer! Borrowers are not obligated to refinance with their existing mortgage provider. You can explore rates from any lender. That said, checking if your current lender can compete to retain your business is wise. Compare their interest rates, consolidation loan options and eligibility terms against offers from other lenders.
Please note various lenders set different caps on maximum loan-to-value ratios if consolidating debt - often between 60-85% LTV.
As mentioned, the risks of placing your property as collateral against a secure loan warrant consulting an experienced and independent mortgage broker. They can assess if, in your specific situation, the benefits truly outweigh the hazards - or if alternatives like debt management programs better suit your needs.
The loan-to-value ratio is key. Many lenders set LTV ratio caps between 60-85% when folding unsecured debts into mortgages. Meeting eligibility terms is also crucial:
Unfortunately, bad credit can reduce your options, as lenders predominately base eligibility on the size of your debt and your credit history.
However, there is still hope, as there are specialised lenders who serve those managing debt issues and take a holistic view beyond just credit scores and maybe willing to offer you a mortgage.
Sometimes, it may not be possible to get a mortgage until your credit score has improved or you have reduced arrears. This is why it is always best to consult with an experienced mortgage broker like ourselves before you take action that could affect your home.
Our team have over 30 years of experience to help ensure that you make the right decision for your circumstances.