Thinking about debt a consolidation mortgage?
These are our frequently asked questions.
What is debt consolidation?
Debt consolidation is a term used when you borrow a larger sum of money from one lender to pay back multiple smaller debts with different lenders. This can be secured like a debt consolidation mortgage on your home or unsecured like a personal loan.
What are the different types of unsecured debt?
Unsecured debt is offered based on your credit history and your ability to pay back the loan. It is generally more expensive than secured debt because it represents a higher risk of non-payment.
The different types are:
- Personal loans.
- Credit cards like Visa or Mastercard.
- Store cards, such as Next or Argos.
- 0% credit agreements, for sofa’s etc.
- Car loans.
What is the difference between short-term and long-term debt?
Generally, the shorter the term of the debt the higher the interest rate. Payday loans and credit cards are examples of this type of credit. Long term loans such as mortgages tend to offer lower rates of interest over a longer period.
What are the different types of secured debt?
Unsecured debt is offered based on your credit history and your ability to pay back the loan. It is also secured against property, usually a house, car or high value item. It is generally cheaper than unsecured debt because it represents a lower risk of non-payment because it may result in the loss of the property secured against it.
The different types are:
What is APR and how do you work it out?
APR or annual percentage rate is the amount of interest that you pay each year for every pound borrowed. Here are some examples:
If you borrowed £1,000 on a credit card and the APR was 30%, the interest payment for the year would be £1,000 x 30% = £300 per year or £25 per month.
If you borrowed £1,000 on a mortgage and the APR was 5%, the interest payment for the year would be £1,000 x 5% = £50 or £4.16 per month.
Can I borrow extra money on my mortgage to consolidate my credit cards and for home improvements?
Yes, you can borrow more money when you remortgage subject to a couple of things.
- The new loan doesn’t exceed the maximum that your income will allow.
- There is enough equity left in the property to meet the lenders criteria. Equity is the term used to describe the amount of money left if the property was sold and the loan paid off, or your share of the property.
People borrow extra money for lots of different reasons, here are a few:
- For home improvements, to add more space or an extra bedroom.
- Pay off unsecured loans or credit cards. This can reduce your monthly outgoings.
- Remortgage to raise extra money to pay off a partner or spouse as part of separation or divorce.
- To raise money to buy another property.
- Remortgage to borrow extra money to help your children with university or set up a new home.
Do debt consolidation loans hurt your credit score?
Having lots of debt or multiple loan applications can reduce your credit score. Generally, consolidating debt into another loan or mortgage can reduce your credit score in the short term, but if you meet the terms of the new loan or mortgage, pay off and close all the old accounts and manage the rest of your finances well it should quickly improve.
Is it bad to consolidate debt?
This isn’t a simple yes or no answer. It is different for everyone and it depends on your existing mortgage terms, how much debt you have and how long the debt is over. The most important thing is that you understand the implications of debt consolidation and you only do it once.
The best was to know for sure is to get in touch and we can let you know. We would love to hear from you.
How long does it take to remortgage?
The remortgage process can take anywhere from 2 weeks to 6 months depending on how complex the situation is.
The following gives you a simplified version of what happens.
- Find the perfect mortgage.
- Submit application to the mortgage lender.
- All applicants credit history will be checked.
- All required documents sent to the mortgage lender.
- The mortgage lender will check the documents.
- The mortgage lender checks the property.
- Once the mortgage lender is happy, they will issue a mortgage offer.
- It’s time for the solicitor to complete the legal part of checking the property.
- The solicitor will then pay off the current mortgage lender and everything is transferred to the new mortgage lender.
Don’t worry we will check and chase everything until the big day.
What documents do I need to consolidate my debt into a mortgage?
Most debt consolidation mortgage lenders will need the following documents but is does differ depending on your circumstances.
- Proof of who you are, so a passport or driving licence.
- A full list of your existing debts, the monthly payments, balances and end dates.
- Address history, so the lender can see how you have managed any other loan agreements that you have.
- Proof of income, to assess if the loan is going to be affordable.
- Bank statements, to check how you manage your finances and double check some of the other information you have given.
When arranging a mortgage, we may need all these documents or just 1 or 2, feel free to speak to us about what we will need for your specific circumstances.
How much can I borrow on a debt consolidation mortgage?
Mortgage lenders calculate how much they will offer you either as a multiple of your salary or a more complex affordability calculation.
The simple form is your annual salary x 5. So, if you earn £30,000 per year x 5 the lender would offer you £150,000.
Other things lenders consider when calculating the maximum loan are:
- Time in current job.
- The way you are paid.
- Commission, bonuses and overtime.
- Any debts.
The amount you can borrow can vary drastically from lender to lender, so don’t get disheartened, get mortgage advice from someone that deals with more than 1 lender and get a bigger picture of what is available to you.