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Mortgage in a Debt Management Plan

Getting a mortgage in a DMP is not easy. It might be possible to release equity from a property you already own by remortgaging or getting a secured loan. However you will need to use an sub prime lender.

Already in a Debt Management Plan and need help? Give us a call (0800 044 5407) or complete the form below to speak to one of our experts

How to get a Mortgage in a DMP?

Getting a mortgage in a DMP (Debt Management Plan) is not straight forward. Due to your poor credit rating it is unlikely that you will able to re-mortgage with your current lender. In addition you will not be able to go to another high street bank. You might have already tried this and been refused.

To get a new mortgage you will need to apply to a specialist mortgage company. These are commonly known as sub-prime lenders. They are reputable companies who will lend to you even though you have a poor credit history. However you cannot apply directly to one of these lenders yourself.

You will need to speak to a specialist mortgage broker who understands your unique situation and can help you make your mortgage application.

Why get a Mortgage in a DMP?

A Debt Management Plan can last for a long time. As a home owner one of ways you can significantly reduce the length of your Plan is releasing equity from your property to settle the debt early. Of course if you release equity you will end up with a larger mortgage. However managed correctly you will end up with less debt overall.

Your unsecured debt will reduce because your creditors will usually agree to write off 50% of the balances in your Plan in return for the lump sum. In some cases they will accept as little as 30%. In addition the interest rate you pay on your new mortgage is likely to be far less than the expensive credit cards in your plan.

It is important to remember that if you release equity from your home and use this to settle DMP debt you will be changing unsecured debt into secured debt. If you then struggle to pay your mortgage your home is at risk of repossession. You must be certain that you can afford the new mortgage payments without needing to supplement your income with more unsecured borrowing.

How much can you borrow?

You could get a mortgage in a Debt Management Plan of up to 85% of the value of your property. This is as long as you have not missed any payments during the last 12 months. The amount you can borrow will drop to 80% if you are managing the Plan yourself rather than using a provider to do it for you.

Given this before releasing equity is an option your current mortgage will normally need to be less than 80% of the value of your property. The value of many properties has risen over the past 2-3 years. As a result releasing equity is now a reality for more and more people and could well be for you.

DM4U Tip: If you do not know what your property is currently worth it will not cost you anything to find out. All you need to do is contact a local estate agent and tell them that you want to sell. They will come round and appraise your property. Once they have sent you their details and valuation in writing you simply say you have changed your mind.

What rate of interest will you pay for a mortgage in a Debt Management Plan?

If you get a mortgage in a Debt Management Plan it means that your current mortgage will be paid off. You will then start a new deal with a different lender. Because you are now borrowing from a sub-prime lender it is highly likely that the interest rate you pay on the new deal will be higher than the old one. However the rate may not be as bad as you might think.

The rate you can expect to pay on your new mortgage is likely to be between 3%-5% over the Bank of England base rate. Of course if you were paying a lower rate before your ongoing mortgage payments will increase. As an example an increase of 1% against a mortgage of £200,000 is an extra £2000 a year or £167 a month.

You have to understand exactly what this increase will be. You can then weigh it up against the fact that you are going to use the funds you release to settle your DMP debt. Assuming the creditors agree to write off 50% of what you owe you only need to increase your mortgage by £10,000 to write of £20,000 of unsecured debt. As such your overall debt will reduce. In addition if your debt management payment was more than the increase in your mortgage payment then overall you will be saving money each month.

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