Remortgage with Credit Card Debt
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Remortgage with Credit Card Debt
Lewis Shaw explains the process of remortgaging with credit card debt.
What is a debt consolidation remortgage?
A debt consolidation remortgage is where you’re using the equity within your home to clear unsecured debt.
Let’s say that your home is worth £200,000, your existing mortgage is £100,000, and you have £20,000 in debts on credit cards. If your income supports it, you could remortgage to raise an additional £20,000. Your new mortgage will be £120,000, and you can use that £20,000 to clear that unsecured credit.
Effectively, you’re securing additional borrowing against your home. You pay off the debt, and your new mortgage carries on as usual.
Can I remortgage with credit card debt?
Yes, but it comes with caveats around how much credit card debt there is and how much equity you have within your home.
It also depends on whether or not there is potentially a spending problem. I don’t mean that to sound contrived or as an accusation, but it’s not a good idea to remortgage away a load of credit card debt only to run up more in the future.
We have a duty of care to make sure you’re not just putting yourself into a worse situation. But you can remortgage your credit card debt, depending on the circumstances.
How does credit card debt affect a remortgage? How will credit card debt affect my mortgage application?
If you’re carrying credit card debt and it’s going to remain in place – you’re not paying it off – then of course a mortgage lender will take that into account when they’re assessing your affordability.
A significant amount of credit card debt can affect how much you can borrow on a mortgage. It’s on a spectrum, influenced by your income and the rest of your credit profile.
The effect it has will come down to how much debt there is and how often you’re using that credit card.
Lots of people do credit card balance transfers to harness particular benefits.
Credit card debt can affect your overall credit score. If you have high credit card debt compared to your income, that’s a determining factor in both credit-scoring and the affordability process when you apply for a mortgage.
What are the eligibility criteria for a remortgage for debt consolidation?
Primarily, it’s around how that debt was accrued. How will you ensure you don’t get yourself into those circumstances again? Generally, mortgage lenders don’t like to do debt consolidation more than once. Some will do it twice, but it’s unlikely beyond that.
Otherwise, it’s the same eligibility criteria as for any other mortgage. As long as your income is sufficient, your credit history is good enough, and there’s enough equity, we’ve got access to all the lenders out there. Specific stipulations do come with this, but speak to a mortgage advisor and we’ll guide you on that.
My mortgage application was declined. What can I do?
If you tried to remortgage and the application was declined, the best thing to do is speak to a mortgage advisor. Ordinarily, the lender will tell you why it was declined, which could be for many different reasons.
Mortgage lenders have very specific rules around assessing affordability. If you’re remortgaging to pay off unsecured credit card debt, even if you’re telling them you’ll repay that, some lenders still factor it in as if it won’t be repaid. Other lenders will exclude it from the affordability calculation because you’re planning to pay it off.
Each lender sets their own policy on this. It could be simply that the mortgage is affordable, but you’re declined because that lender factors that debt in. So speak to a mortgage advisor, explain why it was declined, your circumstances and what you’re looking to do, and we’ll guide you on the right course of action.
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How much can I remortgage for under these circumstances?
You can remortgage for any amount as long as it’s within the Loan to Value bandings, which means you can’t remortgage for more than the value of the home. If your home is worth £200,000, you obviously can’t remortgage for £250,000.
Mortgage lenders always want there to be a minimum level of equity, typically 5%. If your home was worth £200,000, you may be able to remortgage up to £190,000. However, not every lender will do that, and certainly not to consolidate credit card debt.
It really depends upon your income, your circumstances, the remaining term on your mortgage and the reason for the remortgage. If there’s going to be equity remaining, and your income and circumstances allow, you can remortgage for however much you need.
What are the key things to know when remortgaging with credit card debt?
If you’re paying a very high interest rate on a credit card, you may feel you’ll never be able to repay it.
Remortgaging can help you consolidate that debt. Obviously, you’re then securing unsecured credit against your home, which is not ideal.
It can be a great help, as long as there’s a plan to ensure you don’t get into that situation again. You’ll be paying a much lower interest rate on a mortgage, potentially, than on a credit card, but the disadvantage is that you’re reducing the amount of equity in your home.
A bigger disadvantage, and a key factor to be aware of, is that you’re stretching that debt over a much longer period of time. So even though the interest rate is lower on a mortgage versus a credit card, you could end up paying more interest. You’re taking something that may have taken you five years to pay off and instead stretching it over 20 years.
When you’re considering doing this, it’s crucial that you understand what you’re actually getting into. Even though it may free up disposable income in the here and now, the overall impact may be worse.
Can you consolidate credit card debt twice?
You can consolidate credit card debt twice, but many lenders won’t like it and will simply say no.
They don’t like it because they’re starting to see a trend.
If you’d already consolidated credit card debt and then subsequently got into the same circumstance again, it looks to a lender that there’s a spending issue. They don’t want you to keep removing the equity from your home. They would prefer you to rectify the spending issue instead.
It might be sensible to speak to a debt counsellor to understand the circumstances that led to this situation. We don’t want to keep eating away all the equity – because at some point the chicken has to come home to roost.
Is it better to have a personal loan or credit card debt when remortgaging?
It really won’t make much difference whether you have a personal loan or credit card debt when remortgaging. It’s all about the lender’s affordability calculations based on your income, your circumstances, the term of the mortgage and the value of your home.
Lenders aren’t particularly precious about this. It’s just whether it’s affordable, sustainable, and you’re going to be in a better situation in the future. There’s no right or wrong answer when it comes to personal loans or credit card debt. It’s all about the specific circumstances.
What else do we need to know about remortgaging with credit card debt?
The Financial Conduct Authority, which is the regulator for mortgage advisors and mortgage lenders, has very specific rules around consolidating unsecured debt.
We have the standard financial conduct rules that we have to abide by for every mortgage application. But when there’s consolidation of unsecured debt, an additional layer of rules kicks in.
So, if you’re considering this, don’t be surprised if there are a few additional hoops to jump through. It’s simply because we have to make sure that consumers with credit card debt receive excellent advice, understand what they’re doing and recognise the implications of securing unsecured credit against a mortgage.
Mortgage advisors aren’t trying to be complicated or picky. We’re acting in your best interests, ensuring that the right outcome happens for you.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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