What Loan to Value (LTV) ratio do I need to get a debt consolidation mortgage? If you are thinking about a debt consolidation remortgage to consolidate existing debts, you need to consider your LTV ratio.
In case you’ve forgotten since your first mortgage application, we explain what an LTV ratio is, and what LTV you’ll need to remortgage for debt consolidation purposes. We’ll even discuss how to get a debt consolidation remortgage when you have a bad credit history.
Debt consolidation recap
Debt consolidation is a strategy to reduce the number of creditors you owe and potentially reduce monthly repayments and/or reduce interest on monthly repayments. It works by taking out new credit and using it to pay off multiple debts. For example, you might take out a debt consolidation loan and use the loan to pay off other loans and credit cards.
The two most common ways of consolidating debts are to use an unsecured debt consolidation loan, as described above, or to use a balance transfer credit card. If you use a balance transfer card, you’ll be able to transfer the balance of other credit cards onto the new card.
Can I borrow more on my mortgage for debt consolidation?
You can borrow more on a mortgage for the purpose of debt consolidation, also referred to as a debt consolidation remortgage. Releasing home equity can be advantageous to some homeowners, but getting mortgage advice is essential. Unlike other strategies, your home is on the line.
What is a debt consolidation mortgage?
A debt consolidation mortgage works by releasing the money you already paid off within your current mortgage. This money can then be used to pay off multiple debts while making your mortgage bigger.
A debt consolidation remortgage is a serious decision because the secured loan is secured against your home. You should seek mortgage advice and debt advice before deciding to consolidate debts with a new mortgage. And you should only apply for a new mortgage with a lender that is authorised and regulated by the Financial Conduct Authority to avoid scams.
There may be more suitable debt solutions and debt consolidation options available.
Remortgaging for debt consolidation FAQs
What type of debts can I consolidate as part of my mortgage?
You can use a debt consolidation mortgage to consolidate personal loans, credit cards, store cards and unsecured additional borrowing. You cannot use a debt consolidation mortgage or any other debt consolidation product to consolidate UK student loan debts.
What are the pros and cons of a debt consolidation mortgage?
There are pros and cons of choosing to remortgage to consolidate debts. However, sometimes these pros and cons are dependent on personal circumstances. Have a read for yourself:
Debt consolidation remortgage pros
- Streamlines debt repayments and makes budgeting easier
- Fixed end date to your debt
- Potentially lower interest rate depending on the market
- Tax benefits if your home interest payments qualify as a deduction (buy-to-let properties)
Debt consolidation remortgage cons
- More risk compared to other consolidation methods. Your home may be repossessed if you don’t keep up.
- Adds years to your mortgage
- Additional fees associated with remortgaging, including but not limited to mortgage advice
What is Loan to Value (LTV)?
LTV is a measurement within a risk assessment completed by lenders before agreeing to award mortgages. The calculation is used to determine the element of risk when lending a certain amount to you.
If you want a mortgage for any purpose, your chosen lender will calculate your Loan-to-Value ratio. Most mortgage lenders will state the maximum LTV they will consider for a secured loan.
Loan to Value is calculated by dividing the amount of the secured loan by the property value. You then multiply the answer by 100 to calculate a percentage. For example, if you apply for a mortgage of £250,000 with a deposit of £50,000, the calculation would be:
£200,000 (loan amount) / £250,000 x 100 = 80%
The LTV in this example is 80%. It would need to be adjusted for remortgaging, e.g., maybe not including a deposit.
What LTV for debt consolidation is needed?
When taking out any mortgage or remortgaging, the lower the LTV the better. Every lender is different but the maximum Loan to Value ratio allowed is typically 80-85%.
If your LTV calculation is above 85%, you could be rejected or subject to higher interest rates because you are seen as a greater risk. The same applies when you are applying to remortgage for debt consolidation purposes.
Can I get a debt consolidation remortgage if I’ve got a bad credit history?
You might still be able to remortgage to consolidate even if you have a bad credit history. It will depend on the lender and the details of your credit score. However, just like having an unsatisfactory LTV ratio, having a poor credit score will usually mean you are offered a mortgage deal with a higher interest rate.
You should try to tidy up your credit score before making a new mortgage application. Registering your name on the electoral register and looking at your file for mistakes (and having them removed!) are two easy tasks that can bump up your score.
How do I know if a debt consolidation remortgage is the right choice for me?
Unless you are a mortgage or finance expert, you probably won’t know if a debt consolidation mortgage is the best option available. There may be more advantageous consolidation methods or even other debt solutions that could give comparable results without putting your home on the line. And that’s why it is so crucial you get professional advice before making a decision. You may have to pay for these services, but you’ll pay more if you make the wrong decision.
Further debt consolidation remortgage advice!
MoneyNerd has a host of articles and guides dedicated to consolidating debts. If you want further information, including on remortgaging for debt consolidation, then look no further. Search our site now to get answers to your questions.
And always remember that free debt advice charities can support you!