How can I consolidate my debt?
Consolidating your debt involves moving some or all your debt to one form of credit. The most suitable type of credit for you depends on your individual circumstances, including whether you’re a homeowner or first-time buyer.
First-time buyers
There are two main ways of consolidating debt as a first-time buyer:
1. Debt consolidation loan - you may be eligible for an unsecured debt consolidation loan (or personal loan) that doesn’t require any collateral. This could be used to clear different types of debt, like loans, store cards and credit cards.
2. Balance transfer credit card – you could consider moving any outstanding credit card debts onto a new card with a low or 0% interest rate.
The most suitable option for you depends on your eligibility and individual circumstances. The best rates across both loans and credit cards tend to be offered to those with high credit scores. Remember, spreading a loan over a longer period can reduce your monthly payments. However, it may increase the overall cost due to more interest being added over time.
Homeowners
If you are already a homeowner, you could consider a personal loan or balance transfer credit card (as above), but also a homeowner loan (or secured loan). However, this would usually need to be paid off before you move house, typically from the proceeds of the sale.
As a homeowner loan is tied to your property, you may be able to borrow more and at lower interest rates compared to a personal loan. But any missed payments could put your property at risk (in the worst-case scenario).
Before you apply, it’s important to speak with a qualified adviser who can assess your individual circumstances to see if it’s a suitable option for you.
Can I get a debt consolidation loan before buying a house?
Yes, it is possible to get an unsecured consolidation loan (or personal loan) before buying a home if you meet the lender’s criteria. But you can’t get a secured consolidation loan (or homeowner loan) through us without a property to act as collateral.
Does debt consolidation affect my credit score?
When you apply for a consolidation loan or any type of credit, your credit score may dip temporarily. This is because the lender carries out a hard search of your credit file, which stays on your report for 12 months. But if you always pay on time and don’t make multiple applications at once, your credit score should recover quickly.
As a rule of thumb, leave about six months between applying for a loan (or other type of credit) and making a mortgage application.
Remember, missed loan repayments will damage your credit score and affect your mortgage application. So, you need to make sure the loan is affordable before you apply.
Can I get a mortgage with a debt consolidation loan?
Yes, you should be able to get a mortgage with a debt consolidation loan if you always pay on time and meet the lender’s eligibility criteria.
A consolidation loan won’t affect your mortgage approval unless you miss payments and/or the loan impacts your affordability. This is the case for any type of loan.
Pros and cons of unsecured debt consolidation loans
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Pros |
Cons |
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All or some of your debts will be in one place. |
It may not be worthwhile if you have a small amount of debt, or terms that are due to end soon. |
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It might be more manageable if you only need to make one payment to one lender each month. This could reduce the risk of missed payments. |
The repayments may be unaffordable, so you need to do your sums before you apply. |
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You may have lower monthly repayments. |
Spreading your repayments over a longer timeframe may mean you pay more overall. |
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Your credit score may improve if you keep up with your repayments. |
Your credit score will decrease if you miss payments.
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You could be eligible for a lower interest rate than you’re paying on your existing debts. |
You may need a high credit score to get the lowest rates. |
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A lower interest rate could help you pay your debt faster and, in turn, reduce your debt-to-income ratio. |
A consolidation loan may have a lower interest rate, but it won’t reduce the amount of debt you owe. |
Does debt affect my mortgage eligibility?
Yes, the amount of debt you have and how you’ve managed those debts affects your eligibility. If you have a good payment history, then lenders may be more willing to approve your application than if you have bad credit.
But having debts is not the be-all and end-all. Lenders will also look at the bigger picture and consider your debt-to-income ratio, as well as other factors.
What is a debt-to-income ratio?
Your debt-to-income ratio (or DTI) represents how much of your monthly gross income is used to pay debts.
To work out your DTI, you need to add up all your monthly debts (such as credit cards, overdrafts, loans and car finance). Then divide the total by your monthly gross income (what you earn before tax).
For example, if you owe £1,000 a month and earn £2,000 a month, your DTI will be:
- £1,000 debt divided by £2,000 income = 0.5
- Multiplied by 100 = 50%.
Ideally, you want to aim for a low DTI, so you aren’t spending a high portion of your income on debt. A high DTI (typically 40% or higher) can limit your ability to get approved for a mortgage, as lenders may see you as a higher risk.
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 MoneyHelper to find out more.
What else do mortgage lenders look at?
Each mortgage provider has different eligibility criteria, but factors they usually consider include:
- Your credit score
- Your affordability
- Your employment status and income
- Your financial history
Read on to find out more about mortgage criteria.
Will debt consolidation affect my existing mortgage?
A consolidation loan shouldn’t affect an existing mortgage unless it's unaffordable and causes you to miss your mortgage repayments.
Missed mortgage or secured loan payments may lead to your property being repossessed (in the worst-case scenario). They will show up on your credit file for six years and can affect your eligibility for finance in the future.
Check your eligibility for a debt consolidation loan
- Reduce your monthly payments
- Personal and homeowner loans available
- Getting a quote is FREE and won't affect your credit score
Intelligent Lending Ltd is a 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.
Verity Hogan
Personal Finance Writer
Verity is a personal finance writer and journalist with over 13 years of experience working in a variety of industries, including 3 years specialising in motoring and debt. She contributes engaging, informative guides on everything you need to know on debt consolidation and car finance for Ocean.
