Re-Mortgaging With A Debt Management Plan
Re-Mortgaging With A Debt Management Plan
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Debt Management Plans (DMP for short) are a smart solution at certain times, simply because they are not legally binding.
If you or a company administering a DMP for you can get all creditors to agree to reduced monthly payments, preferably with interest frozen or capped, they can get creditors to shut-up, stop the threatening warning letters, and generally, allow you to stop stressing over past repayment problems.
It’s not to say that creditors won’t escalate repayment issues, because they still can. Action can still be taken when a DMP is in place, resulting in an Individual Voluntary Arrangement(IVA) being put in place. This is a more serious issue as it is legally binding.
When an IVA is in place, you’re required to prioritise that as part of your household monthly budget, always being the stated amount by the due date to keep the creditors at bay otherwise further action can be taken yet again. Since a DMP is not legally binding, it can be a little more flexible. If your circumstances change, you can simply call the company administering the plan, and ask for a payment reduction, after which they can negotiate lower payment amounts with creditors.
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However, whilst an IVA is a more serious debt problem than a DMP, mainstream lenders typically treat the two as one of the same. In terms of assessing your ability to manage finances, both are categorised as indicators that you’re not good with money management, therefore a liability and locked out of many high-street lenders remortgaging products, and other loans. In essence, using a DMP was a good decision to deal with accounts in default.
When your mortgage needs renewed, your DMP needs reviewed
Mainstream lenders will not extend credit to anyone with an active DMP in place, certainly not an IVA. That’s because creditors can take action resulting in an IVA, so DMPs are considered to be very high risk. Therefore, it’s unlikely that you’ll get a remortgage from a high-street lender when you’ve an active DMP.
Remortgaging can eliminate your DMP
Unless you’re using a charity to administer your DMP, chances are not all your payments are being paid towards your debt. If you’re paying a debt management company, eliminate them to get your debts paid faster.
For those who did the research beforehand, and knew to work with a debt charity for a DMP, remortgaging can be used to pay off all the debts that have already been rolled up into the DMP.
The sooner it’s done the better for your future credit files, because everything recorded is only retained for six years. Six years from the date your DMP is settled, it’s scrubbed from your credit files. Everyone deserves a second chance!
During those six years, your DMP will show as settled or active. While you’re still paying debts down, it’s an active DMP. If you were to remortgage, you’d release some home equity, use that to pay all creditors and have the DMP report on your credit file show as settled.
It’s better to have a settled DMP than it is to have an active one. And whilst it will be retained for six years on your report, the longer it’s been – the less impact it has.
Lenders know people find themselves in financial hardship at some point or another. They don’t want to risk lending when you’re in financial hardship, which a DMP can indicate.
When they see it’s been settled for a couple of years of more, they can stop sweating, knowing that the worst of your cash flow problems are over. And that you’ve been responsible enough to take active steps to pay creditors back and not blanket refused payment.
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Once your DMP is settled, it’s imperative that it’s the last bad thing reported, because it’s viewed as a positive since you’ve cleared bad debts. For that reason, the remortgaging payments must be paid on time, every time, and all your other accounts held in good standing to keep your credit report on track to getting back to being a trustworthy borrower.
Any missed payments, accounts in default and CCJs will reverse the positive action of clearing your debt because you’ve essentially paid off a non-legally binding repayment plan, only to risk your home by defaulting on a secured loan, which is legally binding.
When you remortgage, you use your home equity – the amount of your property that you own, and not the banks share through a mortgage – get a lump sum based on that equity and pay that to your creditors to clear bad debts and move your DMP from active to being settled.
Know the risks…
All types of mortgage products are secured loans, which are arranged using your home as security for the loan. These are also referred to as home owner loans, and home equity loans.
The term secured essentially means you’re promising to pay the loan back and if you fail to, your home is at risk of repossession. That is not to be taken lightly. The weight of just one missed payment on a secured loan is heavy on your credit report.
An IVA is nothing in comparison. It’s possible and likely to get a remortgage on decent terms with an active DMP, but if you clear that off by remortgaging and fall behind on the payments for the secured loan, it’ll make it near impossible to access any type of finance. And the lenders, who do consider your application, will have an extremely high rate of interest for extending you a line of credit. For anything!
It is highly advised that those with an active DMP, who are considering releasing home equity to pay off debts, seek professional financial advice before proceeding.
After guidance and it’s deemed you’d be suitable, the next advisable step is to analyse the market using a whole-of-market mortgage broker. This gives you access to all the specialist lenders who specifically deal with bad credit mortgages for those affected by adverse credit in the past and current.
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Understanding LTV (Loan-to-Value) Ratios
Loan-to-Value ratios are shown as percentages. If you’ve done any mortgage comparison research online, you’ll see these represented as 75% LTV and 95% LTV as examples. It’s rare you’ll see 100% LTV. What they’re representative of is how much a lender is prepared to finance.
A 95% LTV mortgage would see the borrower require a 5% deposit with the lender providing finance for the remaining 95%, which is the vast majority of standard mortgage products.
However, as a DMP affects your credit file, it’s likely that you won’t be eligible for the majority. With any type of poor credit history reported on your credit files, the LTV ratios are reduced on the lenders end, usually in the region of 50% up to 75% – although 85% is possible.
Essentially, whether you have an active or settled DMP, you’ll only be able to borrow between half to three-quarters of the value of what you own in your home.
If you’ve only paid 45% towards the total payment of your mortgage, the difference would need covered as a deposit.
The amount of your home that you own is not the property value. You own what your property is worth minus what you’ve paid towards your mortgage.
To use an example: The average house value in Yardley, Birmingham is £156,000. A mortgage with an LTV of 75% would only allow £117,000 to be borrowed. To secure the mortgage, you’d need a £39,000 deposit.
On the other hand, if you’ve bought your home about a decade back or below market value, you might be sitting on additional cash that’s locked into your property.
That could happen if you bought your home at £100,000, and using the data from above, know that the average property in the Yardley area of Birmingham is £154,000, and then you’ve £54,000 at least in equity. Reduce what’s paid on your mortgage, and you’ll find there’s even more.
The value of your home is what it’s valued at now. Not what you bought for. That value can be higher or lower, so if your home has lost value, you’ll have less equity available. With enough home equity available, it can be released using a remortgage, then used to pay all creditors on your DMP, then to have your credit files updated to reflect the DMP is settled and no longer active.
Why it helps to clear your DMP
Remortgages are treated the same as mortgages in terms of the affordability criteria that applicants must meet. They are affected by an affordability test that all lenders are required to do to ensure borrowers can afford the repayments.
The more monthly outgoings you have contributing to a DMP, the less disposable income you have available. That’s a problem because it affects the amount you can afford to pay back, without your affordability assessment indicating that you’d struggle to put food on the table or keep the lights on.
Your affordability assessment must show that you can afford to make the repayments; therefore reducing monthly outgoings will help prove that you can afford the repayments for the loan.
Can you get a remortgage with an Active DMP?
With specialist lenders, you can. Going through a mortgage broker service covering the whole-of-market will give you access to a wider pool of bespoke lenders that understand that these things happen.
Bad credit from the past can be put aside provided the lender is comfortable with the level of risk. In terms of risk, there are some that specialist lenders will take that standard banks will not consider.
Borrowers with an active DMP can have:
- Some late payments (max 3 months late usually)
- Some defaults (max 2 registered in the last 2 years, any number older than this)
- Some CCJs (max 2 registered in the last 2 years, any number older than this)
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When a credit file shows anything more serious than the list above, there’s less chance of being approved. It should also be noted that if you have existing penalties reported on your credit file, such as an IVA, a previous bankruptcy filing, or repossession, and an active IVA, you will have a limited range of lenders willing to accept that level of risk.
If you have an active DMP, remortgaging is a way to access funding using your home equity to get yourself out of the situation. It’ll change your DMP filing on your credit report to being settled from active.
Additionally, by eliminating the DMP, you also eliminate the chance of any creditor on your DMP taking legal action against you for the remaining sum outstanding and effectively turning a non-legally binding agreement into one that is legally binding when an IVA is issued. That would severely impact your credit rating.
Remortgaging lets you access finance, pay off existing bad debts to settle a DMP, which wipes out the risk of further action being taken. Advice should be sought first though because by remortgaging, you’re also shifting unsecured debts into secured debts. Defaulting on secured debts has much more severe ramifications than an IVA. With an IVA, life goes on. Your home being repossessed, that’s a different ball game.
Need advice? Contact us – we’re a non-judgemental friendly bunch with a wealth of information.
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