What is Consolidated Debt?

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How to consolidate debt?

Risk of Consolidating Debts

Consolidating Debt Considerations

Consolidated debt is when you pay off any outstanding personal loans, overdrafts, store cards, and/or credit card balances, using the equity you have built up in your property.

Often, it can be stressful simply making the minimum interest payments on store and credit cards and not seeing the overall balances decrease. Consolidating your debts will not reduce the amount you owe; however, it will give you a more affordable and manageable repayment plan.

How to consolidate debt?

To consolidate debts, you will need to be accepted for a specialist debt consolidation mortgage. If you are accepted, you will then be able to combine your current mortgage along with your debts into one monthly payment.

There are several types of debt consolidation mortgage loan that may be suitable for your personal situation, these are:

A debt consolidation mortgage, this is where you do not have an existing mortgage on your property, and you are looking to raise funds to repay your debts.

A debt consolidation remortgage, this is when you have an existing mortgage on your property. Your new mortgage lender will take over the loan from your current lender along with allowing you to borrow more money to repay your debts.  

A further advance mortgage, these work well when you are currently tied into a deal with your current lender and there are early redemption charges that apply should you switch lenders. A further advance for debt consolidation is a second mortgage with your existing lender and will typically be at a different rate than your main mortgage. You will have to do a new application and pass underwriting again. In the future, when both deals are out of a fixed rate, we can then explore your remortgage options.

Secured loans, if you are declined a further advance mortgage from your existing lender for one reason or another, then a secured loan may be an alternative route for debt consolidation. A secured loan is a second mortgage with another lender, secured against your home, that runs alongside your current mortgage.  In the future, when your existing mortgage and your secured loan are out of their fixed rates, we can explore your remortgage options to bring them together. 

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Risk of Consolidating Debts

Whilst consolidating debts can seem attractive, there are risks that you need to be aware of and fully understand.

Personal debts such as store and credit cards are usually unsecured lending facilities, this means that they are not secured against your home. The worse that can happen if you do not pay the money back include bailiffs, getting a poor credit score, and no more lending.

By consolidating debts, you will be securing the outstanding credit on your property. This means that in the event of non-payment, your lender could repossess your home causing you to be homeless with no chance of getting another mortgage for a long time.

The interest for consolidating your debts using a mortgage can initially seem lower, however, as you are spreading the debts out over more years, could amount to more over the duration on the mortgage loan.

Consolidating debts is classed as a specialist lending type, therefore, as your mortgage broker we need to ensure that you fully understand the risks involved. Without seeking trusted mortgage advice, consolidating debts could put you in a worse position that before.

Consolidating Debt Considerations

We will look at the interest rate/s you are paying on each type of credit and work out whether consolidating debts will be beneficial and if any more cost-effective solutions are available. For example, consolidating a 0% balance credit card with a lot of months left at this deal could be a bad outcome.

Also, we will look at how long left you have on each credit facility, for example, if you only have less than 12 months left on a personal loan, it might not be beneficial adding this on to your mortgage as the overall interest will be much higher over the long term.

Alarm bells will start ringing with mortgage lenders if you repeatedly consolidate debts as this will evidence that you are unable to manage your money and live beyond your means. If you are accepted to consolidate debts, then it is an opportunity for a fresh start and to close your credit cards to avoid a repeat application down the line.

For a mortgage lender to consider a debt consolidation remortgage application your loan to value ratio will be important, this is how much equity you own in your property. The more equity you have will increase your chances of being accepted.