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Second Charge Mortgage Debt Consolidation – Guide

second charge mortgage consolidation

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What is second charge mortgage debt consolidation? 

If you want to learn more about consolidating debt and how you could take out a second charge secured loan to do it, read on. We discuss all the key points about second charge mortgages and consolidating debts – right here! 

Don’t worry, here’s what to do!

There are several debt solutions in the UK that can be used to improve your finances. Choosing the right way to tackle your debt could save you time and money, but the wrong one could cause even more harm

It’s always best to find out about all your options from a professional before you take action.

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What is debt consolidation?

Debt consolidation is a strategy used to merge all your existing debts together and make repayments somewhat cheaper. It is the process of taking out new credit and using the money to pay off multiple existing debts, such as personal loans and credit cards. 

You’ll still owe the same amount of debt as before, but instead of owing money to multiple creditors, you’ll just owe a larger amount to one creditor, i.e., the lender you took out the new credit from to pay off existing debts. 

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Why consider debt consolidation?

There are two main benefits of debt consolidation when it is done right. The first is that it makes monthly debt repayments easier. Instead of having to keep track of multiple repayments each month and at different times of the month, going forward you’ll just need to repay one lender. This makes it easier to stay on top of your finances and budget for debt repayments. 

The second benefit of debt consolidation is that it should make repayments cheaper. By taking out new credit with a lower interest rate compared to the amount of interest payable on the existing debts, you can save money on interest. 

However, you should also factor in any other fees that may be applicable, such as early repayment charges on the existing debts for paying them off earlier and possibly fees associated with the new larger credit taken out. If you don’t factor these potential costs in, you could make debt consolidation more expensive. 

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Can I consolidate my debt into a new mortgage?

It is possible to consolidate your existing debts into a new mortgage. This could be achieved in one of two ways:

  1. By remortgaging your existing mortgage to borrow more and use the money to pay off existing debts.
  2. By taking out a second mortgage on the same property by borrowing against the equity in your home. This is known as a second charge mortgage. 

In either case, you should think carefully before securing debts against your home within a new mortgage. And only consider a new or second mortgage from a lender that is authorised and regulated by the Financial Conduct Authority (FCA). 

Remortgaging for debt consolidation

Remortgaging your first charge residential mortgage to borrow more and then using the additional money to consolidate debt is possible. 

For example, you might have a £300,000 home with a remaining £100,000 mortgage. You then switch your current mortgage for a new mortgage for the total amount still owed on the property, and a further amount you need to consolidate debts (secured with home equity). If you needed £15,000 to consolidate debts, this means your new mortgage should be for £115,000. 

You’ll still only have one mortgage to pay and all your debt will have been merged into it. 

Second mortgage for debt consolidation

The alternative option is to take out a second mortgage on the same property by borrowing against your home equity separately. The advantage of this is that your first mortgage will remain active and you will not need to pay any early repayment fees on it by remortgaging – but you may need to pay other fees associated with the second mortgage. 

Second charge mortgages are borrowed against your home equity, so the amount of equity you have will determine how much you can borrow. Once you take the second charge out, the money can be used to pay off all credit cards and loans, leaving you with just two monthly repayments; one for your residential mortgage and one for your second mortgage. 

Why consider second charge mortgage debt consolidation?

Second mortgages can be an advantageous method of consolidating debts. Because they are borrowed against home equity, you might be able to borrow more with a second charge than you could with alternative credit options, which makes consolidation possible for people with significant debt. Although you may also want to check out other debt solutions first. 

Moreover, a second charge mortgage can offer competitive interest rates and help you save more on interest when consolidating. Other fees and charges should also be weighed into calculations to ensure a second charge will save you money overall.

The risks of second charge mortgage debt consolidation

The overarching risk of using a second charge to consolidate your debts is that your home may be repossessed if you cannot keep up with repayments. As second mortgages are secured against your home, not repaying gives the lender the right to seize your home and sell it if you don’t stick to the agreement. Thus, there is a genuine risk of losing your home if your personal finances change. 

Only consider second mortgages from lenders that are authorised and regulated by the Financial Conduct Authority to avoid scams. 

Second charge mortgage debt consolidation – the alternatives!

Using a second charge mortgage can be effective to consolidate, but it comes with great risk. We don’t blame you if you’d rather look for a different way to achieve consolidation. The good news is that there are alternatives. You may want to consider:

  1. Balance transfer credit card – also known as the credit card shuffle, this is a method of consolidating credit card debts only by merging all debt to one new credit card. 
  2. Debt consolidation loan – there are unsecured personal loans offered solely for the purpose of consolidation. Because they are unsecured they come with less immediate risks to your home and other assets should you not be able to repay. 
  3. Debt Management Plan – this is a debt solution that isn’t exactly the same as consolidation, but it does reap some of the same benefits. It gets multiple lenders to agree to a single monthly payment which is split between them, sometimes with all interest payments frozen. 

Discover more on second charge mortgages here!

Learn more from MoneyNerd about the benefits and risks of securing other debts against your home, as well as more on consolidating debts. We have plenty more guides and posts discussing these topics and other ways to get out of debt effectively.