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How to Get a Debt Consolidation Mortgage - 5 Best Options
Financial difficulties can happen to anyone, especially in uncertain economic times. It is all-too easy for life to steamroll us a little, and for more important things to draw your attention away from prudent money management for a while.
You may have been sticking your head in the sand a little, avoiding the problems as best you can to keep managing the day-to-day, or you might have been exploring options for a while, unsure how to best improve your position.
Debt consolidation may hold the key. Read on as we delve into the options available for you to take complete control of your debt obligations.
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Why Use Debt Consolidation? - The Problems with Multi-Layered Debt
Debt consolidation is the process of taking several debts and replacing them with a single, larger loan. It doesn’t actually immediately reduce your debt - it’s not magic! - but it reorganises the structure of your borrowings so that you can regain control.
It is likely that you have a spread of different finance obligations, each with their own payment schedules, interest rates, and terms. This chaotic situation, built up over time, causes some (if not all) of the following:
- Difficulty with money management - Having to keep multiple debts in your mind at the same time is hard and it’s all too easy to forget about one while dealing with a second. Direct debits that come at different times in the month make managing your day-to-day difficult and money being taken automatically to pay for one bill may mean not enough is left to deal with another.
- Overpaying interest - Loans may have been taken out with high interest rates, while lines of credit such as credit cards and overdrafts will see their interest rates climb higher and higher. It can seem like there’s nothing you can do as these interest payments consume the majority of your repayments, making it hard to dent the underlying balances.
- Damage to your credit score - With many different repayments to make each month, missing just a single one can significantly impact your credit rating. The more debts you have, the greater the chance is that you’re inadvertently lowering your score and making it harder to get useful credit in the future.
- Impact to your personal life - Being in spiralling debt is extremely stressful, leading to poor mental health, constant worries, and damage to your relationships.
When you consolidate your debt, you repay all those existing loans (or the majority of them) and reduce the number of repayments you have to a manageable one or two. Stress levels decrease and you are able to face the month in complete control - and with a smile on your face.
Here are the five typical options for debt consolidation mortgages and loans in the UK.
1 - Unsecured Debt Consolidation Loans (and Credit Card Balance Transfers)
Total debt that’s less than £15,000 is considered by many lenders to be relatively low. It won’t feel like that at the time for you if you’re struggling with it, but on a larger lender scale, it’s small-time.
Unsecured debt consolidation is available for this low-level debt. This may be through an unsecured debt consolidation loan, which has set monthly repayments over a prearranged term (length of loan), or alternatively through 0% credit card balance transfer.
At Clifton Private Finance, we don’t offer broker support for unsecured personal loans or credit cards. However, we can offer some advice:
- Interest rates - Unsecured loans and credit cards will have higher interest rates than secured alternatives. This is because they are higher risk for the lender and risk plays a significant part in calculating your personal interest rate.
- Limited use - Credit card balance transfers are only effective when consolidating credit card debt (moving multiple credit card balances onto a single card). They cannot easily be used to consolidate your other debts.
- The importance of good management - While this is true with all debt consolidation, it is especially true when using credit cards or overdrafts to consolidate debts - management of the debt is vital. Credit cards are particularly dangerous as they offer an extremely flexible repayment structure that can easily become repayment avoidance! If this happens, you may find yourself in a similar (or worse) situation at the end of the 0% transfer term. Pro-active, responsible repayment is essential.
- The difficulty of application - Many people looking for debt consolidation are also struggling with poor credit scores. As unsecured loans and credit cards assess you almost entirely based on your credit score, they can be increasingly difficult to get as your financial difficulties continue. Secured debt can help mitigate this problem.
There are some advantages to unsecured debt solutions. Expertly managed, 0% balance transfer credit cards can help you eliminate interest entirely as you pay off the balance, while the speed and efficiency of application means unsecured debt can be processed and completed within 24 to 48 hours.
Nonetheless, at Clifton Private Finance, we prefer the security and power of secured loans over the high interest and potential future problems presented by poorly-managed unsecured loans.
2 - Homeowner Loans - Flexible, Secured Debt Consolidation
A homeowner loan (also known as a second-charge mortgage) is a secured loan that uses the equity in your home as collateral.
It is important to understand from the outset, that a homeowner loan is secured by your property as a guarantee. This means that if you default on repayments, your home is at risk of repossession.
At Clifton Private Finance, we support our clients throughout their loan term and into the future - if you are ever struggling with repayments on any debt consolidation mortgage, we encourage you to contact us as early as possible. We can discuss your options at that time, potentially refinancing the loan to smooth your situation and avoid further difficulties.
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The Cost of Homeowner Loans - Interest Rates Compared
Interest rates are an essential part of debt consolidation, making a huge difference to your repayment ability. Consider the difference between a collection of credit card debt and unsecured loans at 29% to 49% AER, and a secured loan at 4.5%.
If the debt totals £40,000 with an average interest rate of 40%, in a single year it accrues £16,000 in interest - more if the interest isn’t paid off immediately and is left to generate compound interest. In real terms, this can mean that the first £1,330 in repayments each month aren’t touching the balance of the debt, but are only servicing the interest.
A year of repayments later, the high-interest multiple debts would still represent the full £40,000 - more than £1,300 paid each month to achieve nothing. In contrast, the homeowner debt consolidation loan would have dropped to £28,000 - well on its way to being cleared within a few years.
Of course, there’s also no obligation to keep the repayments so high. In a real world situation, you would spread the payments over more years, lowering your monthly repayments to a manageable amount and making a valuable impact on the debt balance.
As long as the repayments were greater than the interest level of £167 per month, your long-term financial situation would be improving.
How Much Can You Get - Homeowner Loans and Loan-to-Value
All loans secured by your property, including your main mortgage and any new debt consolidation homeowner loan, will have their total capped by the value of your home. This is known as the loan-to-value (LTV) ratio.
While some lenders we work with will offer a little more, the standard maximum LTV for homeowner loans is 85%. This means that the balance of all the secured loans when added together, cannot exceed 85% of the value of your home. Calculating the amount you can raise for debt consolidation is as follows:
- Determine the current market value of your home
- Multiply this by 85% to find the maximum loan ceiling
- Subtract your current mortgage balance
- The result is the maximum you can get with a typical homeowner loan
For example, Sean and Fiona own a terraced house with a market value of £288,000. Their maximum loan ceiling is £244,800 (85% of £288,000). Their current residential mortgage balance is £170,000. This leaves them with £74,800 that they could unlock with a homeowner loan.
LTV is not, however, the only factor in determining your homeowner loan size. Your lender will also consider:
- Your credit score - Because the loan is secured, a poor credit score is not as much a major stumbling block as it is when looking for unsecured finance, but it is still relevant. Clifton Private Finance can match you with experienced bad credit lenders who will consider the larger picture to qualify you with a homeowner loan even if your credit score is poor. In all cases, your credit score may impact both the total loan size and interest rate.
- Your affordability - Calculated as a ratio of your income and outgoings, affordability is an important stress test for lenders. On a positive note, when applying for debt consolidation, specialist lenders will use a forecasted affordability test based on the information that you will no longer have monthly outgoings servicing the debts you are about to clear.
- A lender’s valuation - Lenders will conduct an independent valuation on your property to confirm market value. In rare cases, this may affect your estimated figures. If your valuation comes in lower than expected, we will work with you to find the best way forward.
Debt Consolidation… and more…
Though your primary purpose for your homeowner loan is to manage existing debts, you may find you want a larger loan for additional use.
You can use the additional capital for other uses, including:
- Home renovations - This is particularly valuable as in the long term, improving your home adds to its value.
- Large purchases - You may have been putting off buying other things due to your financial struggles. Your homeowner loan will open opportunities to get things you have been wanting, such as a replacement car, a new laptop, or a top-of-the-range washing machine.
- Helping family - Gifting some of the money to help your children, perhaps towards getting them on the property ladder, is a viable use of the money. Note, however, that using the funds to lend the money to others is not permitted under standard loan conditions; any help you give family members must be without the obligation for them to pay it back.
One key consideration is that when your LTV is high, lenders will increase the interest rate (larger loans are more risk for them). While the option to release more capital exists, often it is best to keep the debt consolidation focused to minimise your monthly repayments.
3 - Remortgages - The Power of Full Debt Consolidation
While a homeowner loan is a secondary mortgage secured by your home, a remortgage is a complete refinancing that replaces your existing mortgage in full while simultaneously releasing the funds you need for your debt consolidation.
When you remortgage to consolidate debt, you combine all existing debt - including your main mortgage - into one single loan.
This has a number of advantages and disadvantages to consider:
- PRO: Administering a single monthly repayment for everything helps keep on top of your finances for the future.
- PRO: A remortgage will typically offer the very best rate, superior to even a homeowner loan, for maximum savings.
- PRO: A remortgage may also improve your current mortgage rate, potentially saving thousands on your existing home finance.
- PRO: You may be able to remortgage to a higher LTV - sometimes as high as 90% - giving you access to larger sums of capital.
- CON: Remortgaging will mean you lose any existing interest rate on your current mortgage. If your current mortgage is better than anything on the market today, a homeowner loan may be more beneficial than remortgaging, so as to leave the existing mortgage untouched.
- CON: Remortgaging involves a full credit check, with strict affordability and stress tests - don’t be put off, though, our mortgage team will be with you throughout the application to make everything as smooth as possible.
- CON: Remortgaging is a slower application process that may take many weeks to complete.
At Clifton Private Finance, we will work with you to evaluate your situation holistically, balancing the benefits of both a full remortgage and a second-charge homeowner loan.
With access to the full market of lenders, we will tailor a solution that is the very best for your unique circumstances, ensuring a low rate, affordable monthly repayments, and manageable long-term plans.
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4 - Bridging Finance - Rapid, Short-Term Debt Consolidation for Long-Term Strategies
While not commonly used for debt consolidation, in niche situations, bridging loans can offer an effective solution to specific problems.
Bridging finance is short-term funding that uses your property as collateral for a loan with:
- Application criteria not based on credit rating - bridging finance focuses on the value of the property as security.
- Extremely fast approval time - bridging finance is designed to provide funds within a few weeks or even days.
Cases where bridging finance works as debt consolidation include:
- When building your own home - It can be expensive to have work stop because you run out of money and are servicing multiple debt streams. Bridging finance can bring everything together, lightening the load and giving you the breathing room needed to keep construction on schedule while putting suitable replacement financing in place.
- When intending to sell a property in poor condition - Selling your home is a common way to settle outstanding debts, especially if other considerations make the move preferred. However, a rushed sale may mean taking a low-ball offer, and in some cases the property condition can make it almost unsellable. Bridging finance can give you the money you need to pay off your other debts and renovate your house to maximise its sale value. When sold, the bridging loan is paid off and any additional proceeds are yours for the future.
- When debt interest and repayment pressures are extremely high - Extremely badly structured debt can spiral rapidly, making even a higher-interest solution such as bridging finance a cheap alternative by comparison. Bridging finance lets you clear your stressful debt and can be refinanced with more suitable long-term options, such as a remortgage, once you are released from other obligations and can comfortably work on your application.
The bridging finance team at Clifton Private Finance are specialised in the uncommon corner cases where bridging finance is best used. If you would like to understand more about bridging to clear troublesome debt, consult with a CPF advisor today.
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5 - Lifetime Mortgages - Debt Consolidation in Retirement
Debt once you have left full-time employment and reliant on your pension can be particularly worrying. When you don’t have enough guaranteed income to make monthly repayments, lenders are unlikely to offer you viable remortgage options, homeowner loans, or unsecured funds. Thankfully, a well-developed solution exists with equity release.
Equity release, which includes products such as lifetime mortgages and drawdown mortgages, is a specialist loan structure designed to make the most out of the money you have poured into your home.
Equity release products work by giving you the money today without requiring any payments until you no longer need your home, at which point it is sold to repay the debt and the interest. When you take out equity release, you remain in full control of your home, with no threat of repossession or any need to make monthly repayments.
Equity release:
- Is repaid by the sale of your property when you die or move into end-of-life care.
- Is backed by a no negative equity guarantee that ensures your heirs will not inherit any debt.
- Is regulated to ensure you make a fully informed decision with independent advice.
Equity can be an excellent solution for debt consolidation in later life, removing the pressure of monthly repayments and allowing you to enjoy your retirement with true peace of mind.
Retirement Interest Only (RIO) mortgages also present an option that includes a monthly interest repayment: this means you're comitted to that repayment each month, but the value of your loan does not grow and compound with the interest, protecting your estate for inheritance purposes.
For more information, or to discover how equity release or a RIO mortgage can be tailored to clear your outstanding debts, contact Clifton Private Finance for a free consultation with an equity release advisor today.
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Moving Out of Debt with Clifton Private Finance
While debt consolidation solutions don’t immediately leave you without debt, they will have a significant impact on your life, bringing down the interest you are paying to a manageable level, removing the juggle from your monthly budgeting, and releasing the weight from your shoulders.
However, a wise perspective is important to avoid returning to a worse position a few months or years later. One important consideration is that once you consolidate your debt, the temptation to overstretch will be significant:
- Existing credit cards will still be there - only now with a balance of zero and a large credit limit enticing you to use it.
- Other credit card providers will see your improved credit report and send you new offers.
- Your improved credit score will soon enable you to take out new, larger unsecured loans.
- Offers such as car finance deals, or buy-now-pay-later options will find their way into your inbox.
Without a sensible outlook and firm determination, it’s easy to slide back into debt. At Clifton Private Finance, we advise caution before seeking further debt finance after consolidation - come back to us for advice when you have a real need for additional funding and let us evaluate the situation fully, helping you manage your finances well. Whether it’s for property investment, to start or build on a business, or to access the lowest car finance rates, we’re here to help - responsibly.
