Debt consolidation could help you if you have credit card bills mounting up or a large overdraft that never seems to reduce.
Financial problems can hit anyone at any time. Having a single manageable payment may help alleviate some stress and might give you a bit of spare cash for unexpected repair bills.
But how is that possible if you’ve already got debts? If you own your own home or are currently paying off a mortgage, then the equity in your property could help you manage your debts.
Debt consolidation with a mortgage
Remortgaging could allow you to use the equity you have in a property to pay off debts, including hire purchase agreements or car loans. If you need to know more about what equity is, check out our blog on equity.
Releasing some of the money already paid towards owning your home could reduce the amount of debt you owe overall. Helping to simplify your budget can take pressure off your finances. And having fewer payments to think about can reduce your stress.
Using a mortgage or remortgaging for debt consolidation, helps reduce your overall monthly payments, meaning you have a more to put aside for a rainy day.
How do they work?
To qualify for a for a mortgage that will consolidate your debt, lenders will asses:
- Your credit report and current debts
- Your property’s value
- What percentage of the property you own (equity)
- The amount you want to borrow compared to your income
Lenders usually insist you sign an undertaking drawn up by a solicitor before lending to you. This means your debts must be paid when the advance is completed. You cannot apply for the mortgage then use the money on a new piece of jewellery. The money must only be spent on clearing your debts.
If your current mortgage deal has a great rate, you may lose it if you remortgage. But don’t worry, there is an option that could allow you to consolidate your debts with a second charge loan.
Clearing debts by remortgaging could work out cheaper for you in monthly payments. This can help make your financial situation easier to manage. Why? Well, unsecured debts, such as payday loans or overdrafts, in most cases have higher interest rates compared to secured loans. By using your property as security, you may be able to get a better rate than paying back unsecured loans.
According to Bank of England figures, the average annual rate of credit cards is 21.49%! The average mortgage interest rate in September 2021 was 2.6% according to official figures, so it’s clear to see why repayments are lower.
Of course, remember your property could be at risk if you do not keep up payments on your mortgage! But if you are paying back less, it may work out better for your pocket in the long run.
A mortgage to consolidate debt could help pay off unsecured debts such as:
- Credit cards
- Personal loans
- Payday loans
Should I use a mortgage for debt consolidation?
There’s no simple answer as each individual case is different. Here are some reasons why you may want to consider a consolidating your debt with a new mortgage…
- One payment could make it easier for you to manage your debts.
- Your other debts are paid off, meaning peace of mind.
- You could end up with more cash available each month to save.
However, there are also reasons why you may not want to use a mortgage for debt consolidation:
- While your repayments might be lower, your property could be at risk.
- Interest rates for a mortgage maybe lower than unsecured debts but the repayments are likely to be longer.
- A balance transfer to a new credit card could reduce your payments.
What to do next
If your debts are worrying you, then don’t put it off and struggle. That’s our first piece of advice.
The next is not to rush into a decision. Speak to a mortgage professional who you trust who will take all your circumstances into consideration.
You can speak to the team at The Mortgage Dog, where we will take you through our affordability tests. We’ll also consider your situation before recommending what we believe will help you.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage
You may have to pay an early repayment charge to your existing lender if you remortgage