Remortgaging for Debt Consolidation
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What is a consolidation remortgage?
Remortgaging is moving your mortgage to another lender to borrow additional money. We’re specifically talking today about debt consolidation, which is where a customer is advised to pay off existing debts such as loans, HP agreements, credit and store cards using a single, larger loan.
The larger loan in this case is the mortgage. It’s common for clients to want to do this to reduce their monthly outlay. You’re bringing those smaller debts into the bigger loan.
There may be short-term advantages, like reducing your costs every month, but equally there are disadvantages. Spreading the debt over a longer term means that you are effectively paying a lot more interest.
Remortgaging for Debt Consolidation
Is consolidating a good idea?
We would typically look at a number of different factors, and ascertain the reasons for consolidating the existing debt. We document this very carefully because this is an area of concern with the FCA, the regulator.
We need to do a lot of research to prove that this is the best thing for our customers. Typically, we will ask you how much you owe, the type of debt, the interest rate, the monthly payment, how much is left to pay, exit fees, payment history and the lender’s name.
We’ve got a special calculator which works out the monthly payments, and the savings that could potentially be made. We will always do that calculation on an individual basis and present the results to clients, highlighting the risks as part of that. We ask for a lot of information, but it’s because we need to make sure that it is the right thing for you to do.
What’s the process for remortgaging for debt consolidation?
The major part of debt consolidation is gathering all the information, such as – the type of debt, interest rate, monthly payment, remaining term, exit fees etc. We can get all of that information from your credit reports – we use Checkmyfile because it has all of the different credit agencies. For example, Equifax may not have certain data which Experian has.
Then we do the calculations. We look at any monthly savings that could be made and the cost over the actual term. We have to present an illustration of what happens with consolidating the debt compared with not consolidating.
So we do a lot of research to make sure that this is the right option for you.
What documents do I need?
The documents we need are typical for any mortgage: ID, proof of income and credit report. The credit report is really important here because it lists all your debt and up-to-date balances.
Then we do our normal mortgage research to establish a suitable product for your circumstances. We calculate the savings and present you with the costs of consolidating the debt, and without debt consolidation.
We go into detail as it’s a very high risk area in terms of providing advice.
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What’s the difference between debt relief and debt consolidation?
There was a big mortgage market review in 2014 and the FCA found lots of complaints about debt consolidation. It was largely down to customers arranging their outgoings to make the mortgage affordable in the shorter term.
The main purpose of debt consolidation is to reduce your monthly costs by borrowing extra on your mortgage loan. Say, for example, that your mortgage was low but you had £60,000 worth of debt. Actually what you’re doing in that case is debt management. The loan is to manage your debt, rather than consolidate it.
If so, we need to be very careful. We would need to refer, or get special permissions, to advise on that. This is because we can’t legally advise on debt management. But we’ve got plenty of routes to guide people on and refer them for professional advice.
Can you remortgage with credit card debt? What debt do mortgage lenders consider?
Lenders will accept all forms of debt – credit cards, loans, HP agreements, store cards… you can put all that into one loan.
Can you consolidate debt twice?
Yes, but we’ve had scenarios where we have actually refused to remortgage for the purposes of debt consolidation. We’ve arranged the first remortgage with debt consolidation to clear off the debt, and then we find that it has clearly built back up.
We would have concerns about continually adding debt to your mortgage and not paying it down. Where we’ve seen that, we raise serious questions with the applicant. But you can potentially do it if there’s an absolutely valid reason.
We’ve had scenarios where a member of a family has died and they had to put funeral expenses on a credit card. The debt was £16,000 and they were declined for a personal loan. The credit card had a 47% APR so the monthly minimum payment was not making a dent in the total.
So in that scenario it did make sense. It was a one-off. The estate was in probate and they were waiting for inheritance. So we helped the client through that.
It’s all about making sure it’s the right option for the customer. We don’t want to set you back. A mortgage is one of the biggest commitments you are going to make in your life, and if we get it wrong you could be in debt. We don’t want that. We want to sleep at night.
We always treat customers like we would our own families – that’s how we operate.
How can a mortgage broker help with a remortgage for debt consolidation?
We’re best placed to advise you on your options, making you better informed. It means you can make the right decisions for your future and your money.
Often debt is about mentality. Some people make sure they are paying back their credit card balance. While others just ignore debt, even though it harms their credit score, and puts them on astronomically high interest rates to get more credit.
So don’t ignore it. There are things you can do. Debt can really have an adverse effect – it could impact your health. So get some advice, come to us and we will tell you what we think based on your circumstances and what you want to achieve.
Think carefully before securing other debts against your home.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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