Taking out a mortgage to consolidate debt can be a great solution. Mortgages typically have a much lower interest rate than any other loan product and mean you can include all of the obligations in one monthly payment.
If you are considering a mortgage loan to handle bad credit, a specialist broker with adverse credit experience is essential.
Today, the Revolution Brokers team explains when a bad debt mortgage can be viable and what to expect from the appraisal process.
How Do Debt Consolidation Mortgages Work?
Essentially, this type of mortgage means you take out a loan against the equity in your home to pay off other debts.
If you already have a mortgage, you’ll consider a new mortgage to borrow more on the property and pay off everything else, including loans, car financing, and credit cards.
To qualify for a mortgage to consolidate debt, a lender will assess:
- Your credit rating and current liabilities.
- How much is your property worth.
- The value you want to borrow.
- How much equity you have in your home.
- Your average income or annual salary.
Some lenders will offer a debt consolidation mortgage, but will require you to enter into a legal commitment before finalizing the loan.
This agreement means that you confirm that you will use the mortgage financing to pay off your debts.
Benefits of consolidating bad debt into a mortgage
There are pros and cons of paying off debt through a mortgage.
One of the positive results is that it usually means your monthly repayments go down and your finances are more manageable.
Unsecured loans such as credit cards have much higher interest rates, so mortgaging your debt means you’ll pay lower rates, but potentially more over time, as a mortgage typically lasts for around 25 years. .
However, there are downsides and you should seek professional help before making any long term financial decisions.
The potential drawbacks include:
- Securing debt against your home means that your property is at risk of repossession if you cannot keep up with repayments.
- Mortgage interest rates for bad credit are lower, but because the term of a mortgage is longer, you will pay interest on the debt for a longer period.
- Some borrowers may find that they can refinance bad debt cheaply – the Revolution team specializes in debt consolidation. We can advise you on alternatives such as balance transfer credit cards.
- Re-mortgage usually means paying additional costs such as appraisal fees, legal fees, and arrangement fees.
Maximum borrowing on a bad credit consolidation mortgage
If you have a bad credit history, it is still possible to refinance your debt with a mortgage, but the number of lenders to choose from will be fewer.
Lenders will look at affordability criteria and total debt-to-income ratios to determine how much you want to borrow, if you can actually afford the repayments, and how risky they think the mortgage is since you’ve already had debts. credit problems.
However, remortgage to avoid further bad credit can be a smart solution.
Note that although loan / value limits are usually around 90%, you are unlikely to be accepted for a new mortgage as a bad credit applicant with a minimum deposit.
Give us a call if you want to remortgage to pay off unsecured debt, and we’ll advise you on how much you should be able to borrow based on the value of your property.
Some lenders also have fixed limits on debt consolidation mortgages – so they can offer up to Â£ 30,000 or Â£ 50,000 as a maximum value.
Debt Consolidation Mortgage vs Second Mortgage
A second mortgage can be an option if you’re tied to your current lender and don’t want to remortgage.
Second mortgages are possible but less common if your credit is bad.
A second mortgage is always secured against your home but is a different loan product and runs alongside your existing mortgage.
You may be able to borrow on a second mortgage to pay off your debts. Nonetheless, expert support is essential, as many traditional lenders will not consider offering this loan to applicants with adverse credit.
Expert Advice With Bad Debt Consolidation Mortgages
If you are concerned about multiple debts, a mortgage to regain control of your finances may be a solution. As we mentioned, career counseling is crucial as there are downsides to consider.
As experienced bad credit brokers, Revolution can advise you which lenders are likely to accept your application, ensure you understand financing alternatives, and help you negotiate competitive mortgage rates.
Contact us on 0330 304 3040 or email [email protected] for further advice.