Can I Get a Debt Consolidation Mortgage or Loan?

Answered on 20 March 2024 by

“I want to consolidate credit card debt. Can I get a debt consolidation mortgage or loan and what are the best debt consolidation loans?”

Nicholas Mendes

Yes, it is possible to obtain a debt consolidation mortgage or loan. Debt consolidation involves combining multiple debts into a single loan, typically with the goal of simplifying payments and potentially obtaining a lower interest rate.

By combining multiple debts into a single loan, you can reduce the number of different interest rates, introductory offers and end dates you’re dealing with. This can make your finances easier to understand and manage.

What Is a Debt Consolidation Mortgage or Loan?

Debt consolidation is when you take out a single loan or mortgage your property to pay off multiple existing debts. These debts typically consist of unsecured facilities such as credit cards, store cards, overdrafts and personal loans. If not managed in the right way unsecured debt can build up and become unmanageable.

Here are 2 common ways to consolidate debt:

  1. Debt Consolidation Mortgage
    • Further advance - if you own a home and have equity in it, you may be able to take out a further equity loan in the form of a further advance to consolidate your debts. This type of loan uses your home as collateral and the interest rates are often lower than those of unsecured loans. Keep in mind that using your home as collateral means you’re taking on the risk of losing it if you can't make the payments
    • Refinance- another option is a refinance to a new lender. This is where you replace your existing mortgage and raise additional funds to consolidate debt.
  2. Debt Consolidation Loan
    • Unsecured personal loan - you can apply for an unsecured personal loan to consolidate your debts. These loans are not tied to any collateral, such as a house or car. The interest rates on unsecured loans may be higher than secured loans, and the approval process may depend on your creditworthiness

How Does Consolidating Debt Work?

Consolidating multiple debts into one manageable single payment – like a monthly mortgage payment - can make things a lot simpler. You know exactly how much interest you pay and what your monthly payments are. You also have a clear loan term and fixed end date.

It’s important to note that while debt consolidation will help clear the debts and can reduce the stress and worry of your bills, you could end of paying more overall as the debt will be spread over a longer term.

Have You Considered Managing Your Finances in a More Structured Way?

The abundance of options and the ability to shift debt from one facility to another can be made with the right intentions but the lack of a structure that allows you to clear the debt as intended could result a cycle of debt or could even put your home risk.

The question to ask before looking to consolidate debt by taking out a mortgage on your property is: can the debt be reduced with a clear financial structure or budget in place?

It’s important to review your current income and expenditure and see if it’s possible to use any net disposable income rather than take out a debt consolidation loan. There are many tools online to help with budgeting such as this tool from Citizen’s Advice Bureau.

How Much Can Be Borrowed and What Are the Best Debt Consolidation Loans?

There is no single best debt consolidation solution. What works best for your circumstances depends on your unique situation. It’s important to seek financial advice from a broker when taking out a mortgage that allows consolidating debt. We’ve explained some of the possible options below.

Remortgage Debt Consolidation

With any secured loan, affordability will have an impact on your maximum potential borrowing.

When you consolidate debt onto your property, you’ll typically remortgage your property with the addition to raise funds and consolidate. A lender will need to consider any existing mortgage (first charge) currently on the property and any additional borrowing for affordability. As you’re looking to consolidate the debts, as part of their affordability assessment, some lenders will calculate based your future circumstances and some will base it on your current circumstances. 

The equity within the property will also be a consideration for lenders, some lenders will stipulate a max loan-to-value – e.g. 85%.

Further Advance

A further advance with your existing lender could also be suitable. If you’re currently tied into a long term fixed rate, the early repayment charge might be too expensive to exit. In this circumstance, a further advance with the lender you currently have a first charge mortgage with may be a more cost-effective option.

Second Charge

In the event that your existing lender wasn’t able to raise the amount required or the early repayment charge was too high to remortgage, it may prove prudent to look at a second charge. A second charge will allow you to keep the first charge in place and will stop you from having to pay any ERCs (early repayment charges). Instead, you’ll have a second lender which sits behind the existing first charge mortgage, allowing you to raise the money required. This way you’ll avoid paying an ERC and get the funds you need.

What Questions Will You Ask?

To ensure we understand your circumstances and provide the right advice for debt consolidation we’ll ask for extra detail about your financial situation. This isn’t to catch you out or test your knowledge but for us to make an informed decision as to whether this is the right option for you and which debts would be best to consolidate.

The conversation will cover:

  • Your personal details
  • Your income
  • Your expenditure
  • Learning about your present and future circumstances

With regards to the debts, your adviser will look to understand:

  • What type of debts you currently have
  • Who they’re with
  • The different amounts of debt
  • Interest rates
  • Any redemption costs
  • Currently monthly contributions/payments towards the debts
  • How these debts built up – this will help us ensure any future borrowing is manageable

Before we can make any recommendation, we will ask you for the following:

  • Last 3 months bank statement for all applicants
  • Recent credit file for all applicants
  • Recent credit card statement for all debts
  • Loan statements for all debts
  • Evidence of income – last 3 months payslips/or tax calculations and overviews

Before pursuing a debt consolidation mortgage or loan, consider the following:

  • Credit score - your credit score plays a significant role in the interest rates and terms you can secure. A higher credit score generally allows for better loan options
  • Interest rates - compare the interest rates of the consolidation loan with the rates of your existing debts. The goal is to obtain a lower overall interest rate
  • Loan terms - understand the terms and conditions of the new loan, including repayment terms, fees, and any potential penalties for early repayment

How We Can Help You Find the Best Way to Consolidate Debt

There are many reasons why you might have ended up in a position where you’re considering alternative options to clear debts.

A change in health, loss of a job or family changes – to name a few - can all contribute to a change in circumstances which add to the pressures of managing your finances. But be confident that in any circumstance or situation there is a support. We’re here to help you make the best choice.

Our mortgage advisers are experienced in helping all sorts of clients with unique circumstances come to the outcome that’s right for them. We understand clients have all faced different tribulations, might need extra support, or might not have the confidence when it comes to discuss their finances. We want you to feel comfortable so please be confident in the fact that the adviser you speak to will be fair and supportive and will work hard to help you come to the right decision.

Call us on 0330 433 2927or send us an enquiry.

What Further Support and Debt Consolidation Help Is There?

For many, debt consolidation and even debt for that matter can be seen as dirty words, a taboo subject. It can make any individual feel alone, stuck, and anxious that they’re falling down a rabbit hole with no one to turn to.

It’s important to mention that there is external support for those that need it. If you’re experiencing payment difficulties, see the organisations and charities below:

Ask The Mortgage Experts answers are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them. We recommend you seek professional advice with regard to any of these topics where appropriate.