Debt Consolidation Options for Homeowners

illustration of Debt Consolidation Options for Homeowners

If you’re a homeowner and have some debts, you might be thinking about remortgaging your home. A remortgage is when you replace your existing mortgage with a new one. Remortgaging can help improve your situation, including using the extra money you’ve taken out to pay off your debts. 

If you're considering remortgaging in order to consolidate your debts, it’s a good idea to get advice from a mortgage expert

How does mortgage debt consolidation work?

Lots of people remortgage to consolidate debts as a way to help them manage their outgoings. If you’re thinking about using a mortgage to pay off your debs, there’s two main ways that remortgaging could help:

  • Take a lump of cash out of your home (known as releasing equity) and use this to pay off your debts

  • Get a better deal on your mortgage to reduce your monthly repayments, meaning you’ll have more money available to repay your other debts

If you decide to take out a cash lump sum when you remortgage, you’ll basically be taking out a bigger mortgage. This means that your monthly payments will go up. It’s important to make sure you’re fully informed of the impact that remortgaging will have so you’re still able to keep up with your monthly payments.

You should speak to a mortgage broker when you want to consolidate debts by remortgaging. They’ll know your options and be able to advise you on the best thing to do to be able to manage your money.

In many cases, remortgaging can be an effective way to stabilise your finances and pay off some existing debts. Consolidating your debts into one monthly payment can be a lot more manageable and easier to keep on top of and can also make them more affordable overall.

Remortgaging may also make your monthly mortgage payments smaller if you already own a large portion of the house, as you may be able to negotiate reduced payment terms, or switch lenders to get a better deal.

The main benefit of remortgaging is that you’ll receive a large lump sum, which is useful to have if you’ve got other debts stacking up.

What will a mortgage lender look for when I apply?

To qualify for a debt consolidation remortgage, you’ll have to pass a number of checks from your lender to make sure that you’ll be able to pay off both your existing debts and your increased mortgage payments. This will include a credit check and will also depend on the value of your home, what percentage of it you own and how much you want to borrow.

They might also ask you to sign what’s called an ‘undertaking’ before the mortgage is approved, which is an agreement that you’ll pay off your debts in full when your mortgage completes.

Another option is to take out a second charge mortgage, which is a type of secured loan which uses your home as security, allowing you to keep your original mortgage. This can be appealing if you’re currently on a good interest rate.

Mortgage lenders will mainly check the following things:

  • Your credit report

  • How much your home is worth

  • How much you’re asking to borrow

  • Whether you’re currently behind with your mortgage payments or any other credit issues 

  • What your current mortgage deal is (e.g. if you’re looking to remortgage while still in a fixed deal, you might have to pay a fee for getting out early)

Questions to ask before remortgaging to pay debts

Will my new mortgage rate be lower than the interest on my current debts?

If you’re not getting a better deal on your interest rate, then there’s not much benefit to paying off your debts this way, other than you’ll be making just one monthly payment.

Will I end up paying more in the long run?

Mortgages are a long loan. If you’re planning to pay off your debts sooner than the mortgage term, consider how much more interest you’ll be paying over the course of the mortgage. You can then weigh it up against your current credit commitments. 

Will I get charged for ending my current mortgage early?

Check to see when your current mortgage deal runs out, and if you have to pay a fee for ending it early. If you do have to pay a fee, you’ll need to weigh up if the new deal is worth it. 

Am I on repayment or interest-only?

If you’re switching to an interest-only mortgage to consolidate your debts, then you’re really just putting off tackling the debt. It’s best to go with a repayment mortgage to make sure the debt is paid off. Learn about the different ways of repaying your mortgage in our Guide.

Can I make overpayments?

Some mortgages will penalise you for paying extra month to month. That’s why it’s a good idea to find a remortgage option that allows overpayments. It also means that you’ll have the option to chip away at your debt quicker.

Can I afford for my monthly repayments to go up?

Will you still be comfortable with increased mortgage payments on your current income? If you’d had problems paying debt in the past, have a think about how bigger payments will affect your financial situation. checkmyfile is a perfect way to check your credit history and keep on top of your credit activity.

What mortgage options do I have?

You can:

  • Stay with your existing lender and apply to borrow more

  • Remortgage with another lender

  • Take out what’s called a second charge mortgage - a second loan that’s secured against your home and runs alongside your main mortgage. It can be with another lender

Before you commit to debt consolidation with a mortgage, it’s a good idea to explore all your options for paying off debts: 

  • Use savings or investments - it’s best to use a financial advisor to do this.

  • Take out a loan that isn’t secured against your home - you could get a better interest rate.

  • Talk to your current lender - they might have deals for existing customers.

  • Shift your debts with a balance transfer credit card - there are plenty of 0% and low interest rate balance transfer credit cards on the market.

  • Ask a family member to help.

Whatever you choose, it’s best to get help from an expert mortgage advisor. Our advisors have seen it all - and they’re no strangers to tricky situations! Make an enquiry.

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