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Adding credit card and loan balances to your mortgage usually cuts what you pay each month, because the mortgage rate is lower and the term is much longer. The catch is in that second part. You are turning a debt you might have cleared in three or four years into one that runs for twenty or more, secured on your home. Sometimes it is still the right thing to do. It needs a proper calculation, not a glance at the monthly figure.
How debt consolidation through a remortgage works
You remortgage for more than you currently owe, and the extra is used to pay off unsecured debts such as credit cards, personal loans or car finance. Most lenders want proof of what the money is for and some will pay the creditors directly. Your mortgage balance goes up, your monthly mortgage payment goes up, and the separate debt payments stop. The net effect on your monthly outgoings is usually a reduction, sometimes a large one. Lenders assess the whole thing as a new application: affordability on the higher borrowing, a credit check, and a valuation to confirm the loan to value still works. Many cap debt consolidation at a lower maximum loan to value than a standard remortgage, and some limit the total unsecured debt they will consolidate.
The monthly payment usually falls, but the total interest paid over the term often rises.
Unsecured debt becomes secured on your home, which changes what happens if you cannot pay.
Lenders assess it as new borrowing, often with lower loan to value limits and proof of what the money is for.
The calculation that actually matters
Take the debt you want to consolidate, say £15,000 of cards and a loan, and work out what you would pay in total to clear it over its current terms. Then work out what that £15,000 costs if it is added to a mortgage and paid off over the remaining term at the mortgage rate. In many cases the mortgage route costs more in total interest, sometimes a lot more, because the low rate is applied for so much longer. The monthly payment is lower, which is real and can matter if you are struggling, but it is not the same as the debt being cheaper. When I do this with clients I show both figures side by side, and I also show a third option: adding the debt to the mortgage but overpaying by the amount you were paying on the cards, which clears it far faster and keeps the total cost down.
The risks, plainly
The first is cost over the term, covered above. The second is security. Credit card and loan debt is unsecured; if you cannot pay, the consequences are serious but your home is not directly at stake. Mortgage debt is secured on your home, and if you fall behind the lender can ultimately repossess. Your home may be repossessed if you do not keep up repayments on your mortgage, and that sentence carries more weight once the mortgage includes what used to be your car finance. The third is habit. If the cards are cleared and then run up again, you end up with the consolidated debt on the mortgage and new unsecured debt on top, which is worse than where you started. None of this means consolidation is wrong. It means the decision should be made with all three risks in view.
How lenders treat debt consolidation
As new borrowing, with a full affordability assessment based on your income and outgoings after the debts are cleared. Many lenders cap debt consolidation at 80% or 85% loan to value, lower than a standard remortgage, and some set a maximum amount of unsecured debt or a maximum number of debts they will consolidate. Most want to see the balances and will either require proof the debts have been cleared or pay them off directly on completion. Some will not allow consolidation on interest-only mortgages. A recent history of missed payments on the debts you are consolidating narrows the lender choice further, which is where my bad credit mortgages page comes in.
When it can make sense
When the monthly saving is the difference between managing and not managing, and the alternative is falling behind on unsecured debts at high rates. When the debts are at very high interest rates, such as store cards or overdrafts, so the total cost gap is small or reversed. When you have the discipline to overpay the mortgage by what you were paying the cards, so the consolidated debt is cleared in a few years rather than twenty. And when the loan to value after consolidation still leaves you on a competitive rate, so the whole mortgage is not made more expensive to fund a small amount of consolidation.
Speak to an expert
Thinking about adding debts to your mortgage? Send me the balances, rates and remaining terms and I will show you what it costs each month and what it costs in total, with a third option alongside.
Alternatives worth checking first
A 0% balance transfer card, if your credit file supports one, moves card debt to no interest for a period and costs a transfer fee rather than years of mortgage interest. A personal loan at a fixed rate over three to five years is often cheaper overall than mortgage borrowing for the same amount, even at a higher rate, because the term is so much shorter. And if debts are genuinely unmanageable, free debt advice from a charity such as StepChange or Citizens Advice comes before any remortgage conversation, because a lender will not consolidate debts for someone who cannot afford the resulting mortgage anyway.
Debt consolidation with a further advance
If you are part way through a fixed rate, remortgaging to consolidate would trigger an early repayment charge. A further advance from your current lender, borrowing more on a separate product without touching the existing deal, avoids that, though the lender applies the same affordability and purpose checks. My guide to borrowing more on your mortgage explains how further advances work.
Is it right for you?
It depends on the size and rate of the debts, how long you would take to clear them otherwise, your loan to value, your discipline once the cards are clear, and how much the monthly saving matters to your household. Working through that properly, with the total cost figures in front of you, is exactly what an advice appointment is for. Call me on 01425 203055 or book a 15 minute call and I will run the numbers with you.
Need Personal Mortgage Advice?
Every buyer’s situation is different. While this guide explains the general rules, the right mortgage for you depends on your income, deposit, credit history and future plans. If you’d like tailored advice, I’m here to help, with whole-of-market coverage.
