Remortgage with Credit Card Debt
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Remortgage with Credit Card Debt
Chris Kenny talks to us about how remortgaging with credit card debt works.
What is a debt consolidation remortgage? Can I remortgage with credit card debt?
A debt consolidation remortgage is where you have a mortgage against your property, and you’re borrowing against the equity in your house to consolidate some or all of your existing debt into your mortgage.
Rather than having umpteen different debt repayments, you reduce the number. Often you can reduce the size of your monthly debt costs, as well.
To answer the second question, yes, you can remortgage with credit card debt. The exact terms, the deals available to you and even how much credit card debt you can consolidate with a remortgage is all dependent on your circumstances at the time.
How does credit card debt affect a remortgage? How will credit card debt affect my mortgage application?
It depends whether some or all of that credit card debt is going to be consolidated into the remortgage. If not all of it will be consolidated, lenders will estimate the monthly payments on the debt remaining, and factor those into affordability.
The majority of the time, credit card debt doesn’t have a huge effect on an application unless there’s going to be some residual debt remaining.
That being said, if a very large amount of credit card debt is being consolidated, sometimes lenders are concerned about how that debt’s accumulated, and whether there’s a risk of that debt building up again.
Some lenders have a ‘debt to income’ ratio, and if the amount of debt in the background is a certain amount relative to household income, an Agreement in Principle or an application could be declined through concerns about indebtedness.
What is the eligibility criteria for a remortgage for debt consolidation?
In terms of eligibility, it’s not very different to any other kind of mortgage. It’s just the standard credit checks and affordability checks. Any remaining debts will be factored into affordability.
Even if the debts are to be paid off, a handful of lenders still factor these into affordability. Those lenders are not the right ones for consolidation. But in terms of pure eligibility, there’s nothing really out of the ordinary with most lenders.
My mortgage application was declined. What can I do?
There are multiple different reasons why a mortgage application can be declined. If it was due to over-indebtedness, it might have been a pure criteria point, like that debt to income ratio.
Or it could be down to the underwriter’s discretion. Perhaps they’ve taken a look at the application and decided that there was too much debt in the background, or it was accumulated too quickly.
It would then be a case of looking at a lender with a different underwriting approach. Some lenders are more open to debt consolidation than others. If it has been declined, it doesn’t mean everything stops there.
There are dozens of different lenders around the country and no two of them underwrite cases the same. What one lender may have no appetite for might be the exact business that another lender is after. Being declined is not the end of the world.
Nine times out of 10, there will be another lender – potentially not as on such favourable terms, but still potentially close. The course of action we take really depends on the specific reason for the decline.
How much can I remortgage for if I have credit card debt?
That all depends on the affordability, based on your earned income and how much, if any, of that debt will remain. Any residual debt after the mortgage completes will get factored into affordability. It also depends how much Loan to Value you’re looking for, relative to the value of your property when it comes to debt consolidation.
Quite a few lenders have a cap on the Loan to Value they’ll go to if there’s any element of debt consolidation. In higher brackets, like 80% and above, the options get thinner and thinner.
So, if you’re looking to borrow quite a lot for debt consolidation, it might mean you won’t get the most competitive interest rates on the market, to address the increased risk to the lenders.
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What are the key things to know when remortgaging with credit card debt?
As with anything, there are pros and cons. There’s no magic button, and no one-size-fits-all answer. If you’ve got one mortgage and half a dozen credit cards, you’re making seven monthly payments towards debts. If you roll all of those up into the mortgage, all the credit card balances are gone and just you’ve got one mortgage payment left. That’s the big advantage.
People often want to reduce the size of their monthly payments. For example, if you’re paying £500 a month towards your mortgage and £200 a month towards your credit cards, by consolidating them all, you might just be paying back £600 a month in total. That’s easy maths – you’re £100 a month better off.
But by consolidating credit card debt into the mortgage, you’ll pay interest on it. You might have had it on a 0% balance transfer card, which means you then start paying interest on a debt that you previously weren’t paying interest on. That’s an important thing to consider.
Another disadvantage is that mortgage terms tend to be quite long – sometimes in the decades. If you’ve got a 25 year mortgage and you roll credit card debt up into that, you’re paying off that debt over the full term of that mortgage, unless you pay it down sooner.
If you put a good chunk of your disposable income towards a credit card balance, you could pay it down within three four five years. By rolling it into the mortgage, you may be increasing the time it takes to pay off that debt quite significantly. You’ll also pay more interest on that debt.
There’s no right or wrong answer. It’s really what is right for your circumstances at that particular time.
Can you consolidate credit card debt twice?
In theory, yes, it’s possible. But if you need to consolidate credit card debts twice, the first thing is to ask why you need to do that. If you’ve consolidated your credit card debt once and then you have to do it again, what have you done to accumulate that debt again?
A lot of lenders see that as a red flag – eventually, if you keep consolidating your debt you reach critical mass, so to speak, and you can’t consolidate anymore. That is a very quick way to get into financial difficulty. There’s a risk factor involved.
So while you could consolidate credit card debt twice, a thorough examination of your financial circumstances is necessary, to make sure that you’re not just kind of kicking the can down the road and setting yourself up for trouble in the future.
Is it better to have a personal loan or credit card debt when remortgaging?
That’s an impossible question to answer – because a personal loan may be suitable for one purpose, while a credit card is suitable for another. There’s no right or wrong answer. It’s all about what’s the right thing for the client.
How can a mortgage broker help? Is there anything else we need to know?
Our job is to know who will do what. There are dozens of mortgage lenders up and down the country, each one with their own unique sets of products and criteria.
What one lender has absolutely zero appetite for, another will be more than happy to accept. A lot of people go to their bank having had a good relationship for many years, and purely from a criteria perspective or a regulatory perspective, they can’t help. That can leave people disheartened.
With debt consolidation, people can be feeling the pressure of their debts. And when their bank refuses to help, it’s stressful. As mortgage brokers, we know what lenders will do. We know where to look – not just with credit card debt, but with any kind of unusual circumstance. We know the options to help.
When it comes to debt, make sure that you’re keeping on top of things, not living beyond your means and making sure that any debts you have are comfortably affordable.
Especially if you’re looking to consolidate, missed payments on your credit cards is a massive red flag for lenders. They will worry you are getting into financial difficulty and that makes them very reticent to lend.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
How soon can you remortgage after an IVA?
You can do it on day one after an IVA is satisfied with certain lenders.
What is a windfall clause? Should I beware of a windfall clause if I was gifted a deposit or received money after an IVA?
Nine times out of 10 a windfall clause is included within the terms and conditions of the IVA. It means that if you come into any kind of money unexpectedly, like a bonus inheritance, lottery or gambling winnings, you must pay that in towards the IVA.
That can potentially have an influence on your mortgage options. Even though we’re discussing getting a mortgage after an IVA, certain lenders will still consider lending to you while the IVA is in place.
Something that often ties in with the windfall clause is that you cannot borrow money unless it is to pay off the IVA. They are very important things to look into in terms of an IVA.
I’m not a legal professional, so I can’t say for this for certain, but I would expect that once the IVA has been finished or has been satisfied, you’re not bound by any clauses within that IVA.
So if the IVA has been satisfied and you come into money, I wouldn’t expect you to have to pay that money back.
However, the terms of each individual IVA agreement aren’t uniform and can vary. That would still be something to double check with the IVA practitioner if that is a concern.
Should I declare if I’ve had an IVA to my mortgage lender? Why is it important to discuss an IVA with my broker when applying for a mortgage?
It depends on the exact wording of the lender because with some, it’s similar to a bankruptcy. If it’s over six years old and you’ve been discharged from it, you’re not legally obliged to voluntarily disclose that you’ve had an IVA.
However, if you are asked if you’ve ever had one, you must tell the truth. Certain lenders do ask ‘have you been party to an IVA within the last six years?’ If you’ve had an IVA, but it’s been satisfied for longer than six years, technically you can answer no to that question.
Other lenders ask, ‘have you ever been party to an IVA?’ You would have to declare yes, regardless of how long ago it is, because they’re not putting a timeframe on it. So it depends how the lender words the question.
You must answer honestly, because it can be seen as being deceitful to the lender if you don’t.
What else do we need to know about getting a mortgage after an IVA?
If you’ve had to go into an IVA, that’s one step away from a bankruptcy, which is about as bad as it can get when it comes to your finances. With the lenders who will consider an IVA, the underwriting is very involved and detailed.
You need to make sure that you’ve got your ducks in a row and your bank statements show that you’re now managing your finances perfectly and properly. Basically, we need to show the lender that the risk of lightning striking twice is very small, if not non-existent.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
