When it comes to debts, planning is essential if you want to ensure timely debt payments to your lenders. This is where a DMP comes in handy.
If you’re wondering what you can and cannot do on a DMP, keep on reading as I’ve done all the research for you.
Let’s get started…
What Is A Debt Management Plan?
A debt management plan (DMP) is a plan in which you pay out your debts at a rate you can reasonably afford. Debt management plans require monthly payments.
These kinds of plans are for people with an adverse credit history who have a hard time managing the payment of their dues and talking to their creditors. Basically, your DMP provider talks to every lender for you and works out a plan for you to pay off your debts one by one.
However, you cannot use a DMP to pay off priority debts like mortgage, income tax, child support, council tax etc. You can only use it for non-priority debts.
For example, if you get a mortgage, you cannot use a DMP to pay off your dues as it is a high-priority debt.
If you are paying a fee for your DMP provider, know that all active DMP providers and your DMP itself must be authorised and regulated by the Financial Conduct Authority.
Mortgage While On A Debt Management Plan
Getting a mortgage while on a DMP is not easy, but it’s not impossible.
Your mortgage broker will most definitely check your credit file and consider your other liabilities. This is done to check if you would be able to afford your mortgage while also making payments to your active DMP practitioner.
Similarly, if you intend to consolidate debt into mortgage, you would have a harder time with your broker as he wouldn’t prefer anyone who has an adverse credit history.
People really are reluctant to give huge amounts of money on credit to people with a questionable credit file, and rightfully so. Your mortgage lender trusts you with their money and trusts that a payment will come back in time and you will pay off your credit.
However, a DMP isn’t considered that bad for your credit history when applying for a mortgage. Usually, no lender would give a mortgage to anyone with an IVA or a bankruptcy issue easily but they’re more tolerant when it comes to a DMP.
Remortgaging On A Debt Management Plan
Remortgage while on a DMP is less tricky.
With a mortgage, people are usually allowed to take loans of an amount worth 95% of their property. However, this amount is reduced if you are on a DMP.
Moreover, if you want to consolidate debt on a mortgage, you will not be able to release as much equity as you could without the DMP.
When taking a remortgage against the same property, your lender won’t give you any leverage when it comes to accepting your loan application. He will most probably reconsider and check your credit history again before deciding whether he wants to lend you another mortgage or not.
Also, your ability of debt consolidation in the mortgage will diminish. This is because while on a DMP, you probably won’t get a mortgage worth more than 85% of the value of your house. Any more than that and the creditor would probably refuse credit.
Why It Is Harder To Get Mortgage On A Debt Management Plan
It’s harder as your lender will probably see your credit history before giving you a mortgage. If your expenses show that you’re probably going to have a hard time paying your monthly mortgage payments, you won’t get a mortgage.
Pros and Cons Of Remortgaging While On A DMP
With a DMP, you get a convenient debt solution. You will have to make just one scheduled monthly payment to your DMP practitioner instead of several payments directly to the creditors. The rest is your practitioner’s job.
Moreover, with a DMP, considering your financial situation, the DMP provider might be able to negotiate lower interest rates for you by convincing your creditors to lower their required interest rates.
A DMP also allows you to pay off your debts much more quickly than they were originally going to end.
A major con of a DMP is that you lose your credit cards. You aren’t allowed to take more loans for the time being as you first have to clear your previous outstanding loans.
Also, external credit card companies won’t be too enthusiastic about your DMP either and would not allow you to take more money on loan. This means that your card will most probably be frozen entirely.
Moreover, you cannot miss your monthly payments of your DMP. You have to make sure that you make those payments each month regularly till your DMP ends.
Another DMP con is that not all lenders agree to a DMP as they might be able to get more money out through another way. And if one or two of your creditors backs out of the DMP, it can cause problems for you.
Frequently Asked Questions (FAQs)
How Long Will A Debt Management Plan Stay On Your Credit File?
A DMP will stay on your credit file for six years. After that, it will be erased like other debts that you’ve taken.
Will I Still Get A Mortgage With A Debt Management Plan?
Yes, you can still get a mortgage with a DMP. However, the percentage of the value of your house that you’re allowed to take on loan will fall.
For example, the government has regulated that you can take a mortgage of up to 95% of the market value of your house. If you’re on a DMP, this percentage might fall down and give your less credit.
Do I Have To Include All Debts In A Debt Management Plan?
No, only non-priority debts are to be included in a DMP. The priority debts usually have their monthly payments scheduled on priority. That means that you first have to pay high priority debts, then you can work on paying off your DMP.
Can I Get A Credit Card While On A Debt Management Plan?
You can get a credit card while on a DMP, but it is advisable that you do not take any more debts for the time being and don’t slow down the process of you paying your debts back to your creditors.
This will just increase the size of your actual loan. Adding more to it doesn’t help at all.
Are Debt Management Plans a Good Idea?
If you have a bad credit history, a DMP will most probably do you good. When it comes to debts, anything is better than going bankrupt or going to court over debt and having your assets seized.
If you have a hard time in paying your low priority debts, you can get a DMP. Just make sure that your DMP practitioner is qualified to manage your finances accordingly and can advise you in debt problems.
DMPs are a convenient way to pay off your dues at a lower interest rate.
However, make sure you’re getting a professional DMP practitioner who can manage your debts efficiently and can advise you as well.
Your choice of a DMP practitioner is important in deciding how much money you will be paying back to your lenders.
If you want any additional help or guidance, feel free to contact us. we’ll be happy to help.