A debt consolidation mortgage is a type of mortgage deal where you can use the value of your property to help pay off your debts. For some homeowners, it can be an option to help tidy up your finances.

Typically, a debt consolidation mortgage is a type of remortgage. That’s because lenders are unlikely to offer you one unless you have a mortgage on a property already.

Here, we talk you through everything you need to know about debt consolidation mortgages – from your different options to whether it’s right for you.

Debt consolidation mortgages: the basics

What is debt consolidation?

Debt consolidation is when you take out a new loan to pay off several different debts all at once. 

Let’s say you’re paying off a credit card bill, a personal loan, and a business loan. Each of these loans will likely have different repayments, different interest rates, and different dates when monthly payment is due. Keeping up with all of them can be pretty stressful.

Through debt consolidation, you can take out a new loan – like a mortgage – to pay off all these individual debts. Then, you’ll be just left with the one repayment to make each month.

Consolidating debts can make budgeting easier, reduce interest rates, and minimise the stress of repayment. A mortgage is just one way to do that.

So, what is a debt consolidation mortgage?

A debt consolidation mortgage is a type of remortgage that lets you use the value of your property to pay off any debts – to settle what you owe elsewhere and then make repayments on a single mortgage deal. 

Mortgages are a type of “secured” debt, which means it’s a debt secured against an asset, like a property. Compared to “unsecured” debt, secured debts can have lower interest rates.

Example: You owe £3,000 on a credit card at 20% APR, £10,000 on a personal loan at 5% APR, and £3,000 on another loan at 7%. If you make repayments over 10 years, you’ll be paying back a total of £23,375.92. Take out a 10-year mortgage at 2.5% interest, and you’ll pay £18,075.21.

So in some cases, debt consolidation mortgages can simplify your repayments and reduce your amount of debt overall. It’s not for everyone, though, and we’ll come to why in a moment. 

But first – let’s take a look at how they actually work.

How do debt consolidation mortgages work?

Debt consolidation mortgages tend to work in three ways: a full remortgage, a second charge, or a further advance. 

1. Debt consolidation remortgage

By remortgaging, you can release the equity in your property to pay off what you owe.

When you first took out your mortgage, it was based on the property’s value at the time. But if your property has increased in value – or if you’ve paid off a large part of the mortgage – you now own more value than you did before. That bit that you own is what’s known as “equity”.

A remortgage can let you free up this cash so you can use it to repay debts, fund home repairs, or something else entirely.

Example: Your property was worth £200,000, and between your deposit and mortgage repayments, you’ve paid off £100,000. That’s your equity. If the property value goes up to £250,000, your equity becomes £150,000. You could then get a remortgage worth £150,000, and you release £50,000 to pay off debts.

Now, if your property has fallen in value, releasing equity for debt consolidation won’t always be possible. But you may still be able to use a remortgage to release the cash you’ve paid through monthly repayments.

To get a debt consolidation mortgage – just like any other mortgage – you’ll need to show your lender:

  • Your credit history and how much you owe
  • The value of your property
  • The equity you own
  • How much you want to borrow

Find out more: How does remortgaging work?

2. Second charge

Sometimes, you may not want to fully remortgage your property. Maybe you have an excellent interest rate on your current deal, or remortgaging early could mean high early repayment charges.

Rather than remortgaging completely, you can get something known as a second charge mortgage. This lets you take out a second loan secured against your property. In other words, you’ll have two mortgages on one property. 

Again, you’ll be releasing the equity to settle your finances. But there’s a difference in the way you make repayments. A second charge won’t affect your existing mortgage repayments, but it will add a second repayment alongside your existing monthly repayment.

3. Further advance

A further advance is where you borrow extra cash from your current lender on the same mortgage deal. It can free up cash immediately, but it will mean you’ll have more to pay back in the long run.

Many lenders offer further advances at a minimum of £10,000 and up to 80% of the value of your property. 

Can you get a debt consolidation mortgage with bad credit? 

Yes, in some circumstances, you can get a debt consolidation mortgage with bad credit. 

Debt consolidation mortgages are usually easier to get than other debt consolidation loans, as you have the property to put down as security. But the decision is ultimately up to the lender. 

Find out more about improving your credit score here.

Should I get a debt consolidation mortgage?

That’s up to you. But there are pros and cons you need to consider.

The pros:

  • You’ll simplify your debts. Owing money on payday loans, credit card bills, overdrafts, or personal loans can be stressful and expensive. With a debt consolidation mortgage, you may be able to make simpler repayments to a single lender.

  • You could get a better repayment deal. Loans secured to your property tend to have lower interest rates. That means that monthly repayments can be much lower with a debt consolidation mortgage than with unsecured loans. Depending on specific deals, you could pay less in the long term, too.

  • Take advantage of your home’s value. If debt is holding you back, using the value stored in your home can make sense.

So far, debt consolidation mortgages might sound sensible. But there are important things to be aware of:

  • You can put your home at risk. Secured loans – those tied to a physical asset like a property – tend to have lower interest rates, but they are riskier. If you can’t afford to make the repayments, the lender may try to repossess your home.

  • Mortgages can cost more in the long run. The terms on mortgages are typically much longer than standard loans. While monthly repayments may be more manageable with a mortgage, you could end up paying back more in the long run, depending on the deal.

  • Remortgaging can come with fees. Usually, you pay fees for the early repayment of an existing mortgage deal. Sometimes, these can stretch to thousands of pounds. 

If you’re struggling with debt, a debt consolidation mortgage is not your only option. Talk to a professional at Citizens Advice or the Money Advice Trust to find out your best options.

Where can I get a debt consolidation mortgage?

Most major lenders, including Nationwide, Halifax, and Natwest, offer debt consolidation mortgages, while specific lenders offer loans to borrowers with bad credit scores. 

These deals and lending criteria will vary. At Habito, we can help you navigate your options with ease. Get in touch to find the right remortgage deal for you.