Debt consolidation in the UK – the best methods

It is estimated that around80% of adult UK residents are paying off loans. From mobile phone instalments and car leases to mortgages, financial commitments have become a permanent feature of our household budgets. While there is nothing wrong with responsible borrowing, some people may find at some point in their lives that the total amount of their repayments is too high. Fortunately, in such a situation, you have at least a few good solutions.

What is debt consolidation?

Debt consolidation is a relatively simple process that involves taking out a single, large loan in order to obtain better terms for repaying all liabilities. Usually, consolidation results in lower interest rates and allows for an extension of the repayment period. As a result, the instalments become affordable and the debtor slowly gets back on track.

How can you deal with debt?

There are several solutions, and it is worth being aware that each of them has both advantages and disadvantages. Let us list them:

Further Advance Mortgage

As Moneyhelper notes, a further advance is a form of mortgage extension with an additional portion of cash. The interest rate may differ from that of the original mortgage, but your home remains the collateral. Usually, such a loan can be spread over many years, and its terms are generally better than for unsecured loans.

A further advance mortgage only makes sense if three conditions are met at the same time:

• Your current mortgage is so favourable that it is not worth remortgaging.

• Your lender’s offer is more favourable than the terms you would receive on a second charge mortgage.

• You have already repaid part of the capital on your property.

Relatively few people choose this product because it is not usually a great deal. It is certainly better to opt for a further advance mortgage than to continue paying off credit cards, but it is worth considering other alternatives.

Second Charge Mortgage

A second charge mortgage is a product where** a person applies for a second mortgage secured on the same property. **A second charge mortgage differs from a further advance primarily in terms of who you borrow the money from – in this case, it will be a different lender.

Some say that second charge mortgages are generally less favourable than further advance mortgages – there is a belief that taking out a second mortgage with the same bank will get you a better interest rate. Unfortunately, this is not true. In many cases, the terms offered to you will be average or even worse than those you would get from the competition.

In the credit brokerage industry, it is generally accepted that a further advance mortgage is easier to obtain, but is intended for borrowing relatively small amounts. Similarly, debt consolidation using a second charge mortgage works better when larger funds are needed. In practice, however, you simply need to compare current offers and choose the one that is cheaper.

Unsecured Debt Consolidation Loan

It is worth mentioning that loans not secured by real estate are a specific alternative to mortgage solutions. As a rule,** this type of product is geared towards shorter repayment periods (3-7 years) and has higher interest rates, but does not encumber your property**. Consolidation in this way therefore involves taking out a large loan to repay all smaller ones, without interfering with your mortgage.

While failing to repay your debts always ends badly for yourcredit score, unsecured loans against property are theoretically safer. Although British law allows for the issuance of a so-called order of sale, which would allow the lender to sell the debtor’s property, this happens extremely rarely. It can therefore be assumed that the risk of your home being auctioned off is lower if you decide to take out an unsecured loan. However, this will translate into a significantly higher interest rate, which is important when you want to get your finances back on track.

Remortgage

The fourth solution is remortgage. Although, as a rule, mortgage refinancing is done to obtain a lower interest rate, this tool also allows you to borrow additional cash and spread the repayment over a longer period. By remortgaging, you can therefore borrow money to repay other liabilities, obtaining a better interest rate and spreading the repayment over a longer period.

What distinguishes a remortgage from a second-charge and further advance mortgage is the number of loans – in this case, the consolidation of liabilities is complete, as you combine all your personal loans and home mortgage into one large mortgage. This probably provides the best possible repayment terms, but also a relatively high risk of your home being repossessed.

What should you choose to make debt consolidation in the UK as effective as possible?

You must remember that there is no single, universal method for dealing with debt. Consolidation can always be carried out in several possible ways, and its effectiveness will vary each time. However, we can point out a few typical cases and some standard solutions.

Many small loans, total debt up to £10,000

If you are repaying several small loans worth no more than £10,000, it is probably not worth considering a remortgage or other mortgage-related solutions. Even with such amounts, consolidation is often profitable, but many people should simply focus on improving their financial discipline, negotiating with lenders and prioritising the repayment of small, short-term liabilities. First, get rid of those instalments that are less than £50 per month and that you have to remember about.

However, if you believe that debt consolidation is necessary in your case, look for offers for unsecured debt consolidation loans with favourable interest rates.

Total debt from £10,000 to £50,000

For amounts exceeding £10,000, even small differences in interest rates translate into significant differences – each percentage point on £10,000 translates into £100 in interest per year. This, in turn, makes consolidation through a mortgage a worthwhile move, even if you have to spend a few hundred pounds on commission or mortgage adviser fees at the outset.

If you have been paying off your mortgage for less than 1.5 years or have already remortgaged during this time, a further advance or second charge mortgage will most likely be the most profitable option for you. Due to early repayment charges (ERC), terminating your current mortgage agreement will definitely not be a profitable move for you.

**People who have not changed their mortgage for a long time should definitely consider remortgaging – it may even turn out that debt consolidation will result in a lower total instalment than what they have been paying for their home so far. **Although it sounds almost unbelievable, our customers often pay £150 or even £250 less per month simply because they changed the bank where they repay their mortgage.

Debt over £50,000

The situation becomes more complicated if you are struggling with very large debts, the amount of which exceeds the capital you have already repaid on the property (the value of the house minus the deposit and the principal portion of the instalments). In such situations, neither a second-charge mortgage nor a remortgage will be helpful to you, because at best you will end up with a very large mortgage and an additional unsecured loan.

In such situations, using real estate as collateral for liabilities becomes even more risky. With large instalments, it is obviously easier to fall behind with repayments, which could result in your property being seized and you being evicted. It is definitely worth contacting your lenders and trying to negotiate a settlement with them – this will often be the best option for everyone.

I can no longer manage my debts – what should I do?

We are aware that irresponsible borrowing can lead to serious problems. The constant stress caused by a lack of money and fear of letters from lenders is harmful to your health and can even lead to depression.

Remember that if you are in debt, you can always enter into anIVA, which is a court settlement with your creditors. Although this has a very negative impact on your credit score, it is often the only way to avoid bankruptcy. Less radical options are also available, such as a** Debt Management Plan** (DMP). There are many solutions, and if you make every effort to get out of debt, you will most likely succeed.

If consolidation is not the solution to your problem, you can also contact support organisations. These include StepChange Debt Charity, National Debtiline, Citizens Advice and Christians Against Poverty. Many councils also offer assistance, although the extent of this assistance depends on the current financial situation of the local authority.

Summary

If you know that your debts are placing too much strain on your household budget, it is worth taking action as soon as possible. Running away from your problems will not improve your financial situation.

Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

If you would like to compare further advance, second charge and remortgage offers, please contact us. We will approach your case individually and ensure that you are free of debt as soon as possible. We are here to help you!