Why won’t my banks lend me money against my mortgage-free home?

13 September 2019

Q

I have been thoroughly confused by my two banks’ refusal to lend me money. I own my home outright and it is valued at around £450,000. I owe £38,000 on (mostly) 0% credit cards. No other lending was available to me at the time, and this was accrued due to a somewhat expensive divorce. 

I earn around £24,000 a year.

I want to take out a mortgage on my home to clear my credit-card debts and my £20,000 car loan. I was told I would be eligible to borrow up to £102,0000, provided I had no debts. I’ve pointed out that the mortgage is purely to pay off my debts; if I borrowed £58,000 against my home, I would not then have any debt, but this has fallen on deaf ears. How do I move it forward?

From
TJ/Westerham

A

It sounds as though you need further clarity from your bank as to why they have misgivings about offering the level of borrowing that you hoped for.

Most lenders will allow an amount of debt consolidation when taking a new mortgage, usually applying a limit to the maximum percentage of the property value. In this case the loan-to-value ratio would be low so it should not be a problem.

All lenders will conduct an affordability check to include income and outgoings but there are many that should be able to account for the fact that the debts will be repaid in full on completion of the mortgage.

However, there can be other factors that could affect a lender’s decision. Some will limit the amount of debt consolidation to a maximum amount of £50,000 or less. That could therefore be the cause of the problem, in this case due to the level of borrowing. Others could have misgivings about the level of debt compared with income, either in terms of monthly income required to service the loans or in comparison with annual income. That may require more detail around how and why the credit-card debts were accrued, which as you say is as a result of the divorce.

Consolidating unsecured debts into a mortgage can look appealing as a way of reducing the monthly payment, given the low rates on mortgages.

However, there are other considerations as it could come at the cost of turning short-term unsecured credit into much longer-term debt secured against the home. That could result in more interest being payable over the life of the loan and put the home at risk if payments were not maintained. It is also crucial not to clear shorter term debts like credit cards only for them to begin to build up again.

Ultimately, though, there should be some alternative options to consider if you do decide that a mortgage is the best way forward, and shopping around may help you find lenders that are more flexible in their approach.