Debt Consolidation Mortgages Made Simple
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Debt Consolidation Mortgages Made Simple
What is debt consolidation?
The term “debt consolidation” just describes the process of taking a new loan or some new borrowing to repay some existing loans or debts. This is usually done to bring all of your debts in to one monthly payment, usually on a lower rate or a different term with the idea that it will cost you less in the long run or that it will make the monthly payments more manageable. The new amount you borrow may come from another loan or it could be a mortgage.
Can you add debts to your mortgage?
In most cases yes you can. There are some lenders though that don’t really like doing mortgages for debt consolidation and so their criteria makes it hard to achieve. There are some lenders though who will accommodate consolidating debts and have criteria specifically designed to help.
We help many people add some debts to their mortgage and in most cases, it is a relatively easy process.
Which debts should you add to your mortgage?
You can add all sorts of debts on to your mortgage, the most common are things like personal loans and credit and store cards but generally speaking you can borrow extra money on your mortgage for just about any legal purpose so if you want to pay something off then you can!
These debts can easily accumulate through life and particularly if you experience a drop in income or an increase in expenditure at any point. We also see debts accumulated for things like weddings, holidays and cars too.
It is very important to consider what debts we are adding on to a mortgage and how those debts came about. For example, if you have done lots of home improvements and paid for it all on your credit card or with loans and now you want to repay it all then this is completely fine. Any time you are improving or increasing the value of your home, there is no problem adding this to your mortgage. If you have bought things though, like a car maybe, this is a depreciating asset and will most likely need to be replace long before that amount of money will have been repaid on your mortgage.
A popular one is credit cards. These can often be on a very high rate and if you are only paying the minimum payment each month it will take a very long time to actually repay the whole balance. So, adding it to your repayment mortgage will mean it is guaranteed to be repaid at the end of the term, in a set amount of time.
It is true to say that we don’t like to help you consolidate certain debts to your mortgage. For example, if you owe money on a credit card that is 0%, you shouldn’t really be turning that into a mortgage where you will be paying interest. Small loans or card balances too, less than £500 or so should not really be added in unless it is really necessary. If you just owe a few hundred pounds on a loan you most of us can generally repay that without needing to add it to a mortgage. If you have loans that are due to be repaid within the next 6 months, these are not ideal to add on either as you will be dramatically increasing the term for them over many years.
How do you add debts to your mortgage?
The best time to be doing some debt consolidation is when your existing mortgage is due to be renewed as your current rate ends. This way we can add up what you owe on your debts and your mortgage all together and go to a new lender for a new mortgage to cover the total amount we need.
If you are not due to re-mortgage soon but you still want to consolidate some debts to a mortgage, then you still have some options. Some lenders will allow you to do a “further advance”. This is an extra bit of mortgage from the same lender you are already with. This will usually be at a slightly higher rate or certainly a different rate to what you already have and unfortunately, in most cases, means dealing with your lender yourself! There are only one or two lenders who will allow mortgage brokers to do a further advance.
You can also always move lenders at any time. So we can still go to a new lender and do a re-mortgage as above but if you are part way through your existing mortgage deal you will most likely have a penalty to leave your existing lender. This can sometimes be worth it, but it is an important decision to make. You can find out more about re-mortgaging on our dedicated page here.
There is also the option of a “second charge”. There are plenty of lenders who will lend you extra money to repay some debts in the form of a second charge. This is a second mortgage secured on your home. This type of loan has its pros and cons so you can find out all about second charge mortgages here.
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How much can you borrow for debt consolidation?
The amount you can borrow on any mortgage is called your “affordability”. This will vary from lender-to-lender whatever type of mortgage you need, and debt consolidation is no different. There are however, some lenders who will ignore any debts that are to be repaid when they assess how much you can borrow. Equally there are some lenders who will not and to be on the safe side they like to make sure you can afford the new monthly payments even if you don’t pay off the debts that you say you will. Knowing which lenders fall into which category here is tricky and not something that is openly publicised so speaking to an expert is key here!
We also need to factor in how much equity you have. Most lenders will limit the amount you can borrow if you are consolidating debts to around 80 – 85% of your property value. This is not the case for all lenders and there are always exceptions to the rule but generally speaking we need to make sure you have a decent amount of equity left over.
Should you add debts to your mortgage?
This is always a tricky question. Debt consolidation needs serious and careful consideration to ensure it is the right thing to do for you. You may find that you can dramatically reduce your monthly outgoings by adding debt to your mortgage but that may also increase the amount you end up paying for that debt over a longer period of time.
Consider here what is more important to you, a lower monthly outgoing or a lower total amount to pay back?
The risks to consider:
Debt consolidation mortgages are in a riskier group of mortgages that lenders and brokers consider. We are all obliged to do some deeper calculations and investigate the risks more carefully than if you are just borrowing to buy a house.
We need to consider various risk factors when adding debts to your mortgage including:
Have you done it before? – It is not good to do this once and get yourself in a good position with your outgoings to then get back into a position where we need to do it again. This shows that really you are probably living beyond your means and that maybe some other things need to change? If you keep adding to your mortgage instead of repaying it eventually you will run out of time to get it repaid.
How were the debts accumulated? – Is it lots of purchases that you will continue to do, or money spent on assets that will depreciate and you will need to do it again in a few years? Or was it for making your home better or increasing its value? Maybe it was the odd one-off expense like a wedding?
We need to remember a few important points when it comes to consolidating debt too. You will most likely be increasing the term of the debt, this isn’t necessarily a problem, but you need to be aware it may cost more over the full term than your existing debt. A credit card that you just pay the minimum payment for though on a high interest rate will take years and years to repay so adding it to the mortgage does at least mean it is repaid over a set period.
You will also be taking debts that are typically not secured on anything and adding them on to your mortgage which is secured on your home. That risk warning you see everywhere about being repossessed if you don’t keep up the repayments is very real. An unpaid loan or credit card will eventually wreak havoc on your credit score, but it will not lead to losing your home. An unpaid mortgage most certainly will.
Why use a mortgage broker?
Choosing the right lender to consolidate debts is very important. Some lenders are much more open and willing to lend for debt consolidation than others so knowing which ones to go to and what criteria they all have is very important to make sure you don’t waste lots of time searching and that you don’t end up paying more than you need to.
Think carefully before securing other debts against your home.
Consolidating debt may reduce your outgoings now, but you may end up paying more overall.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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