Does consolidating debt affect buying a home?

Debt consolidation can affect buying a home in both positive and negative ways. It could improve your mortgage eligibility by decreasing your debt-to-income ratio, pay off your debts faster, or avoid missing payments. However, as it will add a new hard search to your credit report, a debt consolidation loan could temporarily lower your credit score.

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Does consolidating debt affect buying a home? 

Consolidating debts can either limit or improve your ability to buy a home with a mortgage. Through consolidation, you can lower your credit utilisation, reduce the risk of missed payments, and potentially secure a lower monthly repayment, which could then improve your mortgage eligibility and affordability.

However, adding a new loan to your credit report could temporarily dent your credit score. You may also pay more interest overall, and if your loan is secured against an asset such as your home, this may be at risk if you fail to keep up with repayments.

What is debt consolidation? 

Debt consolidation is the process of merging multiple debts into a new loan with one manageable monthly repayment. Depending on your eligibility, you may be able to secure a debt consolidation loan with a lower interest rate or a longer loan term (with lower repayments) than your existing debts.

Not only can debt consolidation reduce the stress of having to deal with several different payment amounts, interest rates, and due dates, but it could also help you reduce your monthly repayment amount and pay off your loans faster. However, you may pay back more in interest overall.

How can I consolidate my debt?

There are three main ways that you can consolidate multiple debts:

  • Debt consolidation loan – take out a new loan and use it to pay off your existing debts. This could be unsecured or secured against an asset like your home.
  • Balance transfer credit card – move your outstanding credit card debts onto a new card with a low or 0% interest rate.
  • Remortgage your home – if you have sufficient equity, switch your current mortgage deal for a new one with additional borrowing and use these funds to pay off your debts.

How does debt affect my mortgage eligibility? 

Each mortgage lender has different eligibility criteria, but the factors they consider will usually include:

  • Your credit score
  • Your affordability
  • Your employment status and income
  • Your financial history

The amount of debt you have and how you’ve managed those debts may also affect your mortgage eligibility. If you’ve missed payments in the past or have a high debt-to-income ratio, the lender may worry that you might struggle to keep up with your mortgage repayments.

What is debt-to-income ratio?

Your debt-to-income ratio represents the amount of debt you have compared to your income.

A high debt-to-income ratio (typically higher than 40%) can limit your ability to secure a loan.

To estimate your debt-to-income ratio, simply subtract your monthly debt repayments from your take home salary.

Can I get a debt consolidation loan before buying a house? 

Yes, you can get a debt consolidation loan before buying a home.

A new loan appearing on your credit file may temporarily impact your credit score, but there are also several potential advantages to consolidating your debts before applying for a mortgage:

  • Reducing the number of repayments you need to make each month could make them more manageable and reduce the risk of missing payments.
  • Successfully managing your loan repayments could improve your credit score over time.
  • You may be able to pay off your debts faster and reduce your debt-to-income ratio.

Even so, remember that getting a debt consolidation loan could put your assets at risk (if the loan is secured) should you fail to keep up with repayments, and you may pay back more in total.

As applying for a debt consolidation loan will affect your credit score in the short-term, you may want to wait before applying for a mortgage. Hard credit searches typically stay on your credit report for a maximum of 12 months.

Will debt consolidation affect my mortgage approval?

There’s no reason why successfully managing a debt consolidation loan would negatively affect your mortgage approval. In fact, your debt-to-income ratio may improve if you are able to obtain a loan at a lower monthly rate than your previous debt repayments. But remember, extending the term may mean paying more interest overall.

In contrast, struggling to manage your existing loans, defaulting, or making late repayments can negatively affect your credit score and mortgage approval. 

How will debt consolidation affect my existing mortgage? 

If you’re a homeowner with an existing mortgage, debt consolidation should not directly affect it unless you then struggle to keep up with your mortgage repayments. An unaffordable debt consolidation loan could make it more difficult to pay your mortgage and cover other essential day-to-day costs.

Your mortgage is a priority debt, which means it should be paid before other types of debt, including your debt consolidation loan. However, defaulting on your debt consolidation loan can also lower your credit score, which might affect your ability to secure another mortgage or qualify for a low interest rate when refinancing.

Pros and cons of debt consolidation 

Pros Cons
All or some of your debts will be in one place. May not be worthwhile if you have a smaller amount of outstanding debt or terms that are due to end soon.
It could make your debts more manageable and help you stick to a budget. You will temporarily lose equity in your home, which would be at risk of repossession if you fail to keep up with repayments.  
You might have a lower monthly repayment (but may pay more in interest over the full term).  Your loan interest rate may be higher if you don’t have a strong credit score.
Your credit score may improve if you keep up with your repayments. Your debt may increase if you continue to borrow money after consolidating. 
Your assets will not be at risk unless you choose to consolidate your debts using equity from your home. Your financial situation and credit score could be affected if you fail to keep up with your loan repayments.

Can I get a debt consolidation mortgage? 

A debt consolidation mortgage – also known as remortgaging with additional borrowing – could help you to release equity in your home to help you repay your debts. You can usually remortgage with your current lender or a new one.

These loans are secured against your property, which means your home may be at risk if you fail to keep up with your repayments.

However, if you’ve missed payments in the past and have a poor credit score, you might be more likely to qualify for a debt consolidation mortgage than a personal loan.

What is equity?

Equity is the amount of your property that you own, i.e. what you have paid for, less any debts secured against it, such as your outstanding mortgage balance or a secured loan. It is based on the current market value of your property.

If you’re struggling with debt, you can access free financial advice and support from a professional debt specialist. Visit Money Wellness, StepChange, Citizens Advice, National Debtline, or Money Helper to find out more. 

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Intelligent Lending Ltd is credit broker, working with a panel of lenders. Homeowner loans are secured against your home.

Disclaimer: All information and links are correct at the time of publishing.