Whatever your reason for needing to consolidate your debt, know that we’ve helped lots of homeowners get a remortgage to repay debts, always providing clear cut, honest advice.
This guide explains mortgages for debt consolidation and includes the frequently asked questions and the pros and cons that can help you make the right decision for you.
- I’m in debt, can I remortgage to pay my loans?
- What is a debt consolidation mortgage?
- Do I have to remortgage with my current lender if I want to consolidate debt?
- Why would someone use a remortgage to repay their debts?
- What debts can I consolidate with a mortgage?
- How does a debt consolidation mortgage work?
- Repaying debt to separate creditors v debt consolidation mortgage
- Debt consolidation mortgage example
- Is a remortgage more cost-effective than repaying debts to separate creditors?
- Can I get a good rate for a debt consolidation mortgage if my circumstances have changed?
- What do lenders assess for a debt consolidation mortgage?
- Pros and cons of a debt consolidation mortgage
- Can I get a remortgage to consolidate debt if I have bad credit?
- Is it harder to consolidate debts with a mortgage if you have bad credit?
- Does consolidating debt with a mortgage hurt your credit?
- What are my next steps if I want to remortgage to repay debts?
I’m in debt, can I remortgage to repay my loans?Possibly, yes. There are lenders in the UK that provide mortgages for debt management but your ability to get a lender to approve a debt consolidation mortgage will be dependent on your circumstances as a whole including your income, credit history and the level of equity you have in your property.
These things, along with many other factors, help a lender decide if you’re a trustworthy borrower with the means to repay your remortgage. But don’t let that put you off.
Even people with a shaky credit history may be able to borrow on a mortgage to clear their debts - it’s all about getting the right advice and finding a lender with criteria that you meet. Rules vary between banks and lenders so while one might decline you, another may be able to provide you with an affordable agreement.
However, a remortgage is a big decision and despite the obvious draw of being able to consolidate your debts, there are some crucial questions to consider - the first being whether you can afford a remortgage.
While interest rates for remortgages are typically lower and therefore cheaper than credit cards, personal loans and other unsecured debts, transferring your debts into one loan via a remortgage isn’t necessarily the right choice for everyone.
If your debts feel like they're spiralling out of control, it’s advisable to speak to a financial expert or a debt relief charity like The Money Charity or StepChange. Speaking to someone about your finances can feel daunting but the person at the end of the phone is there to help you, not judge or look down on you.
What is a debt consolidation mortgage?You could decide to sell your property and use the proceeds of that sale to repay your debts and buy a cheaper property but if you’re keen to remain in your home, you might have considered a debt consolidation mortgage.
Homeowners usually take out this type of loan to consolidate (or combine) debt which can make managing money a little easier. The application process is similar to that of a standard mortgage but the biggest difference will be the focus on the level of equity you own in your property.
Equity is the share of the value of your property that you own, as opposed to that which you borrow as part of a mortgage. If you’ve paid off lots of your mortgage or if your home has increased in value, you’ll have a larger amount of equity and this puts you in a better position when you’re searching for potential remortgage lenders.
Do I have to remortgage with my current lender if I want to consolidate debt?You don’t have to get a remortgage with your current lender but it’s always worth comparing their rates too. If a different lender has a remortgage product that is cheaper or has better, more flexible terms, you may be able to switch while increasing the amount you borrow to settle other debts.
Why would someone use a remortgage to repay their debts?To reduce:
- the interest rate on their debt
- their monthly payment amount
- the number of companies they owe money to
Collating those debts into one can alleviate some of this stress, especially if you manage to find a remortgage lender that charges a cheaper rate than your current creditors as that could result in lower monthly repayments. That won’t always be the case as your circumstances i.e. the level of risk you pose as a borrower for not repaying, will affect the rate you’re charged.
What debts can I consolidate with a mortgage?
- Credit cards
- Personal loans
- Payday loans
- Buy now pay later finance
How does a debt consolidation mortgage work?A debt consolidation loan lets you switch all your existing borrowing onto one loan, so you only need to make one monthly repayment to one lender as opposed to separate repayments with varying interest rates, terms and separate lenders.
Depending on your circumstances and your financial situation overall, you might be able to save money with a debt consolidation loan by finding a lender that charges a lower rate of interest – also known as an APR – than you are currently paying.
This won’t always be possible so always calculate your repayments, ideally with a mortgage broker or financial expert, to truly understand how much any hypothetical repayments might cost.
Repaying debt to separate creditors v debt consolidation mortgage
Repaying debt separatelyLet’s say you have a property that was valued at £300,000 at the time of taking out your original mortgage, which has a repayment term of 25 years.
After 15 years, you have a mortgage debt of £147,317, with 10 years to go. Your current lender charges you 3% in interest on a fixed-rate mortgage.
Hypothetically, you could also have additional debts which are currently being paid over 5 years, charged at varying rates of interest with separate lenders:
- £2,000 of credit card debt with 25% APR
- A car finance loan of £20,000 with 11% APR
- A personal loan of £5,000 with 8% APR
Consolidating debts by remortgagingHowever, instead, you might decide to use the value you’ve built up in your home to borrow more on a remortgage, repay your other debts and pay less interest overall.
So, to repay your remaining mortgage balance of £147,317 and have enough to repay your other debts totalling £27,000, you’d need a minimum remortgage of £174,317.
It’s important to stress that the rate you pay for a remortgage will vary heavily depending on the lender and your circumstances but for this example, the remortgage you find is also charged with an interest rate of 3%.
If you were to repay this new mortgage over 10 years at 3%, you’d pay £201,971 overall, and £1,683 per month.
Debt consolidation mortgage example
Credit repayments with multiple lenders
Years remaining for the finance agreement
The total you’ll repay in GBP
10 years overall
£2,017 for the first 5 years and then £1,422 thereafter)
Remortgaging to consolidate debts
Years remaining for the finance agreement
The total you’ll repay in GBP
Debt consolidation mortgage
The above example is hypothetical and the rates and terms provided have been used purely to demonstrate the positive effects of consolidating debt with a mortgage, however, in some instances, monthly repayments could be higher.
The table does not present an accurate reflection of your financial situation, so always seek professional advice from a trusted mortgage broker who can calculate your repayments for various lenders to find you the most affordable arrangement.
Is a remortgage more cost-effective than repaying debts to separate creditors?Typically interest rates for mortgages are much lower than those of credit card providers or personal loan providers but that doesn’t always mean you’ll get a cheaper deal overall.
Shifting your debts with a remortgage might make managing your money easier and sometimes it can be cheaper but so many factors can affect the overall cost.
Lots of mortgage agreements have exit fees for example and the cost of this could outweigh any savings made from lumping all your debts together with a remortgage.
Can I get a good rate for a debt consolidation mortgage if my circumstances have changed?The best interest rates are offered to borrowers with good affordability for the remortgage amount they’ve applied for. You may have breezed through the mortgage application process when you first bought your home but lending criteria can be more restrictive.
- You’ll also be older now and therefore closer to retirement and this can affect the rate you’re charged for a mortgage.
- You might also be self-employed or have experienced a fluctuation in income.
- Your credit history can also affect the rate you’re charged for a consolidation mortgage.
It’s this guidance and extra care that can make the difference between getting the right remortgage, with the lowest rate.
What do lenders assess for a debt consolidation mortgage?
- Your credit report
- The level of debts you have
- The value of your property
- How much equity you own in the property
- Your level of income in relation to the remortgage amount
- How predictable your income is
Some lenders, though not all, will require you to sign an undertaking drawn up by a solicitor. Signing this means that you agree to repay your debt with the remortgage as soon as you get the funds.
Pros and cons of a debt consolidation mortgage
Things to consider:
- A debt consolidation mortgage could allow you to put all your debts with one lender
- This could result in you paying less interest overall and help you reduce your overall monthly payments. You could even save money from the reduced monthly repayments and put the savings towards decreasing your remortgage debt or just enjoying a better living standard.
- If you’ve got debt across different providers, the accumulation of letters and calls you receive can be a little stressful, to say the least. Using the equity in your home to get a remortgage can help you to pay off those debts and have a fresh balance with your mortgage provider.
- Having one lender to repay rather than multiple lenders, can help you to budget better.
- Just because you find a cheaper remortgage rate elsewhere, it doesn’t necessarily mean your new deal will be cheaper overall. Factor in charges in your current mortgage contract such as ERCs or exit fees.
- You’ll also need to meet the eligibility criteria for your chosen lender and this could be different to the criteria of your current mortgage agreement. Your current circumstances including your income, job stability, how near you are to retirement and your credit history will affect your ability to get a preferential rate.
Can I get a remortgage to consolidate debt if I have bad credit?You might be surprised at how many UK lenders are open to lending to borrowers with bad credit. Having a credit issue like a CCJ or being bankrupt affects a lot more people than you might think.
298 people a day were declared insolvent or bankrupt in England and Wales from May to July 2021. That’s almost one person every 5 minutes.
The statistics archive from The Money Charity also reports that credit card debt averaged at £2,022 per household and £1,063 per adult in June 2021.
The important thing to know is that niche lenders are more equipped to provide remortgages to people with bad credit and, more specifically, people who need to consolidate their debts with a remortgage.
Is it harder to consolidate debts with a mortgage if you have bad credit?If your credit rating is low or you have severe adverse credit that’s recent, getting a mortgage with a lower interest rate to consolidate those debts can be more difficult as most lenders will view you as a high-risk borrower.
It’s important to calculate your new repayments with a hypothetical lender vs your current repayments with your creditors to compare whether a remortgage could be cheaper or not.
While having one repayment can be appealing, it might be more difficult to qualify for mortgages with lower interest rates and in some circumstances, your new loan repayment could end up being more expensive.
The amount of equity you own in your property will affect your ability to get a remortgage with bad credit and usually, the more equity you have, the higher the maximum loan and the lower the interest rate. That’s not always a given though because every lender has their remortgage products and terms and conditions.
The important thing to remember is that there are lenders in the UK that are happy to lend to borrowers with bad credit.
Some advertise on comparison sites while others can only be contacted via an intermediary (aka a mortgage broker). Exclusive deals can sometimes be negotiated with current lenders but to get an overview of what you might be able to get elsewhere, compare the whole market with a broker.
Does consolidating debt with a mortgage hurt your credit?Once you consolidate and start paying off your debt regularly, it can positively impact your credit score. Make sure that you don't miss out on any of your repayments, so that debt consolidation does not end up further hurting your credit score.
Applying for any credit, including a mortgage, will affect your credit report and future lenders that read your report will be able to see whether you’ve successfully applied for a debt consolidation mortgage or been declined.
If you’re approved, you may experience a temporary dip in your credit score until you have made a few month’s worth of regular and on-time payments. Furthermore, by getting the consolidation mortgage you can repay your debts which can positively affect your credit score and those debts will appear as settled.
Always check your eligibility for a new loan or remortgage product before applying and this can help you preempt the outcome and avoid getting a credit rejection. A mortgage broker can help you access your report for free in some instances and when doing so, they can advise you on your next steps.
What are my next steps if I want to remortgage to repay debts?Work out how much you need to borrow by adding up all your debts including your current mortgage, credit cars, car finance agreements and personal loans. Look at your income in relation to your current outgoings. Are you struggling to meet repayments now? How would a larger remortgage impact your monthly budget and could you afford the repayments if you experienced a dip in income or unexpected cost?
Perhaps the repayments would be lower and you’re left with money to spare? You might want to think about either using that money to reduce your remortgage, saving it for a rainy day or just to enjoy.
Think about how long you want to repay your remortgage. The term length of your remortgage agreement matters because the longer the term, the more interest you’re likely going to pay overall. That being said, a longer term can spread the cost of the remortgage and reduce the size of monthly repayments which might be more manageable.
Once you know what you want from a debt consolidation mortgage, compare a range of lenders. The best way to find the cheapest and most relevant deal for you based on your circumstances is arguably by asking for help from a mortgage broker but some people decide to search on their own by comparing lenders online.
This can be time-consuming as in the UK, there are hundreds of lenders, each with varying rates and rules about who they’ll lend to and under what conditions. If efficiency is your thing and you don’t want to wait around, contact a reviewed mortgage broker who can locate lenders on your behalf.