Debt Consolidation Remortgages For The Self-Employed

 Our guide to the pros and cons of clearing unsecured debts with a consolidation mortgage

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Graham Cox - Founder & Cemap Mortgage Advisor | SelfEmployedMortgageHub.com
Graham Cox
Director & CeMAP Mortgage Advisor

Paying off expensive debts with a consolidation remortgage can seem like the proverbial no-brainer.  With a much lower interest rate to pay, and your monthly outgoings slashed, it provides much-needed breathing space to get your finances back on track.

Nevertheless, there are potential drawbacks to paying unsecured debts with a mortgage which mean it's not the straightforward choice it might seem at first glance.

The focus of this guide is to help you make an educated decision before you take the plunge.

Read on to learn about the pros and cons and how self-employed applicants are assessed for a debt consolidation remortgage.

What is a debt consolidation remortgage?

A debt consolidation remortgage is a new, replacement mortgage where you borrow additional funds to clear your credit card, loan and other debts. You'll sometimes see it referred to as a debt consolidation mortgage.

To consolidate debt, you must have sufficient equity in your home or property. For example, if you currently own a property valued at £400,000 and your existing mortgage is £100,000, your equity in the property is 75 per cent.

What are the benefits of debt consolidation?

Consolidating your debts by remortgaging can cut your monthly outgoings significantly.

Pay off high APR debts

For example, interest payments for credit and store cards are typically around 20% APR. Yet you might only pay 3-4% interest by consolidating them onto a fixed rate remortgage.

Debt consolidation can help if you have a large amount of expensive credit card debt that you're only paying off slowly. In fact, as a form of revolving credit, credit and store cards are particularly pernicious if you only pay the minimum amount each month.

Beyond any 0% period, interest is added to your balance daily. This means you end up paying interest on the interest, or what's more commonly referred to as compound interest.

According to the March 2022 Money Statistics report, it takes 25 years to pay off a credit card on the average interest rate if you only pay the legal minimum repayment each month.

Apart from reducing your overall monthly outgoings, refinancing your debts through consolidation means you only have the monthly mortgage payment to make. With no other creditors to worry about, it can make life far less stressful.

Are there any disadvantages?

Yes. First, because payments are spread over the lifetime of the mortgage, there's a good chance you'll pay more in interest overall.

With that said, many mortgage products allow overpayments of up to 10% of the mortgage balance per year.

Making overpayments to reduce interest

Overpayments are applied to the mortgage balance, not the interest, This can drastically reduce the total amount of interest paid over the lifetime of the loan, potentially saving you thousands of pounds.

Securing unsecured debts

Second, unlike credit cards or personal loans, a mortgage is a secured debt, with the property used as collateral.

This means you could have your home repossessed if you run into financial difficulties and are unable to keep up with the mortgage payments.

For that reason, you should think carefully before applying for a debt consolidation remortgage. Particularly, if you tend to rely on credit cards for lifestyle financing and are likely to rack up more debt in the future.

Alternatives to a debt consolidation mortgage

So if you're not convinced that amalgamating debts in a mortgage is the right choice for you, what are the alternatives?

Here's a few to consider:

  • Transferring card debts to a zero per cent balance transfer card
  • Consolidating into a personal loan.
  • Seeking free debt advice from a charity or non-profit organisation like Stepchange.org

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Can I get a debt consolidation remortgage if I'm self-employed?

Yes, self-employed applicants can remortgage to consolidate debts just as easily as employed applicants. The only difference is in how the income is assessed.

How much extra can I borrow for debt consolidation?

It depends on the lender.  Every mortgage provider has its own criteria for how much debt refinancing they'll allow as additional borrowing.

For example, many lenders will stipulate consolidated debt cannot exceed a specific:

  • Debt to income ratio
  • Amount
  • Percentage of property value
  • Percentage of total borrowing

Some lenders specify a combination of the above factors.

What types of debt can I consolidate?

You can remortgage to consolidate most legal debts including:

  • Credit Cards
  • Store Cards
  • Overdrafts
  • Personal loans
  • Payday loans
  • Car finance
  • Inheritance tax liability

Are there any debts I can't consolidate?

Yes, the following types of debt are usually not acceptable:

  • Gambling debts
  • Tax liabilities to HMRC
  • VAT bills
  • Business debts

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What eligibility criteria do lenders use?

Each provider has its own lending criteria and appetite for debt consolidation. More cautious banks and building societies won't accept it at all.

For those that do, the mortgage provider's decision will be based on your credit history, the amount and types of debt being consolidated, personal circumstances, and affordability as evidenced by your outgoings and self-employed earnings.

Loan to value (LTV)

With debt consolidation cases, most mortgage providers reduce their maximum loan-to-value by about 5-10% . A maximum LTV of 80% is common.

From the lender's perspective, an applicant who is consolidating debts is seen as a higher-risk borrower. because statistically, they are more likely to get into debt again.

The rationale is that the chances of the applicant struggling with their mortgage payments is therefore greater. The lower LTV protects the bank or building society from making a loss if they need to repossess the property and quickly sell it at auction.

Loan to income (LTI)

The standard LTI for self-employed applications is 4.5 x single or joint earnings, but one or two providers restrict the LTI to 4 x income if clearing debts with extra borrowing.

See our comprehensive guide to self employed mortgages for information on how income is assessed for business owners, sole traders, partners and contractors.

Solicitor confirmation of debt repayment

It's understandable that a bank or other mortgage provider will want to ensure the borrower's debts are paid off with the extra funds.

The last thing they want is an applicant to still have debt payments hanging over them, as well as the mortgage.

For that reason, your solicitor may be required to confirm in writing that repayment of the debts has been made. Some mortgage providers will pay your creditors directly.

Including debts when assessing affordability

Lender policies vary widely on this. Some don't include them in the affordability calculation at all. Others don't include them if they are satisfied the debts will be cleared. Whilst a few will either include the whole debt amount or a percentage of it.

How debts have been managed and credit scoring

Before the application is approved, every mortgage company will check that the debts have been managed responsibly.

They'll want to satisfy themselves that the applicant has made payments on time, and not gotten into financial difficulty at any point.

Verification checks

To verify this, a hard footprint credit check for evidence of missed payments, arrears, defaults or CCJs is carried out. The lender will also review your last few month's bank statements to see if you've used your overdraft.

You may be wondering why it would matter so much to a bank or building society, if the debts are being cleared anyway.

The reason is that from the lender's perspective, the way debts have been managed previously is a strong indicator of whether the applicant is likely to run into financial difficulties in the future. And therefore the risk the lender is taking on by offering the mortgage loan.

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Get a debt consolidation remortgage quote

As you can see, there are a variety of factors involved in finding the most suitable mortgage deal to refinance personal debts.  

As a true self-employed mortgage specialist, SEMH offer independent, expert advice for small business owners

Benefit from specialist advice and niche lenders

We work with a diverse range of mortgage companies. Not just the usual high street names, but also specialist providers who are often more flexible in their approach to self-employed lending.

Get in touch today to speak to an advisor and discover how much you could reduce your monthly outgoings by when you remortgage to consolidate debts.

Call 0117 205 1695 during our office hours 9am - 5pm Monday to Friday, or enquire online here.  We'll answer any questions you have and can provide a quote and Decision in Principle within 24 hours, sometimes the same day.

Faqs

Get answers to your most common questions below...
Can I consolidate secured debts?
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It's certainly possible with some mortgage providers to consolidate secured debts such as a second charge mortgage. The remortgage would replace both the first charge mortgage and the second charge loan.  

Not all lenders are happy to consider consolidating secured debt. Those that do, often impose a lower maximum LTV of around 70%.

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Can I get an interest-only remortgage to consolidate my debts?
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Securing an interest-only debt consolidation remortgage is extremely difficult nowadays.

It's possible a specialist lender might consider it under the right circumstances, and if the loan to value is very low. But usually, the answer will be no.

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Graham Cox

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited. Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK find great mortgage deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, Financial Times, and BBC Bristol.