Debt Re-organisation

Overview

  • Types of debt re-organistion are: re-mortgage, secured loan, equity release, lifetime mortgage, unsecured consolidation loan, switching to a cheaper product(s) if eligible (e.g. interest free credit card periods)
  • Sometimes fees & increased interest to consider
  • Usually no write off
  • Can increase indebtedness
  • Usually extends the period of debt repayment
  • Sometimes secures unsecured debt, assets may be put at risk
  • Registered defaults may already affect credit rating
  • Borrowing may be at high end interest rates
  • Consolidation loans that are not fixed interest rates may be a risky debt strategy
  • Affordability calculations may restrict the amount of borrowing
  • Receiving expert financial advice is essential
  • Important to cancel all lines of credit once consolidation has been done

How it works

You apply to a lender for a loan to reorganise, or clear your debts. These loans are often advertised as ‘consolidation loans’. This means you swap some or all of your creditors for just one creditor. If you own your home, the lender will probably want to take a charge* on it.

If you're 55+, you may be eligible for a lifetime mortgage product which secures your borrowing plus interest on your property. Under these terms, you're not required to make repayments., the loan is repaid upon death or move into long-term care. You can make voluntary payments to reduce the debt.

You may be able to re-mortgage to extend borrowing & release capital to pay debts. This will depend on your income multiples, loan to value debt ratio,, age & credit rating.

You should seek independent advice about whether any of the above products would be in your best interests. Money Advice Hub provides a list of trusted independent financial advisers. You should always shop around for the best deal but if you have a poor credit rating, you may not be able to get loans on the best terms.

A consolidation loan will only help if:

• it is used to pay some or all of your existing debts

• the repayments on the new loan are no more than those you are already making towards your existing debts, & you can afford to make them.

Otherwise, the new loan will add to your debt burden & make your problems worse. You will also need to look carefully at how long the loan will take to repay, what interest you are going to have to pay compared with what you are currently charged; and what charges or penalties there are, e.g. for late payments.

*Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold, and if you do not adhere to repayment terms agreed, your home could be at risk of repossession.

Pros

  • You will be making one monthly payment on one loan rather than many payments to different creditors
  • Your monthly payments may be lower, or at least should not be any higher
  • Enforcement will be stopped if you can borrow enough money to repay a priority debt
  • You may not have to pay any repayments if you are eligible for a lifetime mortgage product
  • If you choose a partial (voluntary) payment lifetime mortgage, this can replace an interest only mortgage. A credit check is not required, unlike a re-mortgage.
  • Consolidation may protect your credit rating if not already affected

Cons

  • You may have to pay fees for arranging the loan, these can be high. Always ask for full written details of all fees.
  • If you have a poor credit rating, you may not be able to get a loan or you may be offered poor terms and conditions, for example a high interest rate
  • If the loan is secured on your house or other asset, then it could be taken from you (repossessed) if you do not keep up the payments
  • Interest rates on secured loans are often not fixed, they often change over the loan period, making it difficult to work out what the total cost of the loan will be. You must check if the interest rate is fixed or variable.
  • Consolidation loans are often offered over a longer period of time than your original debts. This means that even if the interest seems reasonable, the length of time you have to repay it can increase the overall cost of the loan significantly, so you end up paying more.
  • If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and make it more difficult for you to make all your payments.
  • An increased re-mortgage may increase your mortgage payment & if the borrowing increases your loan to value ratio, you may not benefit from the lowest interest rate deals.