How to Consolidate Debt by Raising Funds
If you own your home and want to roll other debts into your mortgage, you’re usually looking at either a further advance with your existing lender or a remortgage with additional borrowing. There isn’t a special “debt consolidation mortgage” as such. It’s standard mortgage borrowing, but the lender will want to know the purpose of the extra funds and may ask for details of the debts you plan to repay.
Ask your current lender for a further advance to consolidate debt
If your existing mortgage is on a good rate, the cheapest route can be to ask your current lender about a further advance or additional borrowing. That can be quicker and may avoid some of the costs that come with a full remortgage, although you still need to pass affordability and credit checks.
It’s also worth checking whether your current deal has early repayment charges. If it does, remortgaging away purely to consolidate could be expensive in the short term, even if the new rate looks attractive.
Consider a remortgage for flexibility when consolidating debt
If your lender can’t help, or their rates are uncompetitive, a remortgage with extra borrowing is the next option. Many lenders will consider debt consolidation, but some will restrict it, and those that do allow it will still apply full affordability and credit scoring.
This is also where people get caught out by “free legals” packages. Some deals cover the basic remortgage legal work, but if your case needs anything non-standard, you may still face additional legal costs.
Decide on a fixed or variable rate for debt consolidation
A fixed rate gives you predictable payments, which can be useful if you’re trying to stabilise your monthly budget.
A variable or tracker rate can be cheaper initially and more flexible, but your payments can rise if rates rise. If the whole point of consolidating is to reduce pressure and create certainty, a fix is often the more natural fit, even if it isn’t the lowest headline rate.
Repayment type: be careful with interest-only
Most people consolidating debts are better suited to repayment, because it steadily reduces the balance over time.
Interest-only mortgages can reduce the monthly payment, but it only makes sense if you have a credible repayment plan for the capital at the end of the term. Without that, you can simply be deferring the problem.
Remember when consolidating debt that a cheaper monthly costs will mean a higher overall cost
Consolidating debts into a mortgage can lower your monthly outgoings because the term is longer and the rate is often lower than unsecured credit.
But you can end up paying more overall, because you’re spreading the debt over many years and you’re securing it against your home. If you miss payments on unsecured debt, it’s serious. If you miss payments on a mortgage, your home is at risk.
So the right question isn’t “can I reduce my monthly payments?”, it’s “does this reduce risk and cost overall once I include fees, term length and the total interest?”
Look at alternatives that can be better in the right situation
If the debts are mainly on credit cards, a balance transfer can sometimes be cheaper than turning short-term debt into long-term secured debt, as long as you can clear the balance within the promotional period.
If the debts are structured and you can repay them over a defined time, a personal loan can also be a cleaner option, because it’s unsecured and the term is shorter, even if the rate is higher.
What’s the Best Way Raise Funds to Consolidate Debt?
When deciding which option to consolidate debt is best for you, it’s a good idea to look at the following figures:
- Your current monthly payments across all debts
- The new combined monthly payment for each consolidation option
- The total interest and fees you’ll pay under each consolidation route
A bad credit mortgage broker can help you do this properly and can also check which lenders will accept your purpose of raising funds to consolidate debt, as well as how much they will lend based on your current affordability. Just as importantly, your mortgage broker can flag when consolidation looks tempting on monthly cost but leaves you worse off over the longer term.
Call on 023 8235 2300 to learn more.
