If recent cost of living increases have left you struggling with debts, you might have considered increasing your mortgage to pay off what you owe elsewhere.
This can seem especially appealing since property prices have increased significantly across much of the UK. This sometimes means a mortgage lender will be able to lend more than they had previously – unlocking more money.
Whether you’re attracted by lower interest rates or just feel like you have no other option, it’s really important to understand the pros and cons of adding to your existing mortgage before you make a decision. Spoiler alert – it’s not the ‘no-brainer’ many people think it is.
In this straight-talking guide, we’ll explore those pros and cons – as well as all the different options you have.
Nothing you read online considers your unique circumstances – so it doesn’t constitute financial advice – but it does give you some options to take away and talk to mortgage lenders or your mortgage broker about in more detail.
How do people clear debt with additional borrowing?
Before we get into the specifics of additional borrowing on mortgage to clear debt, it’s a good idea to understand how this kind of borrowing works.
In financial terms, borrowing money to clear debt is known as ‘debt consolidation‘.
What is debt consolidation?
Consolidating debt really just means adding up lots of smaller debts, taking one loan to cover that overall amount, then using this bigger loan to pay off each of those smaller amounts.
This is especially appealing when people compare interest rates. It’s not uncommon to have credit cards that charge 20% APR – and payday loans often have shockingly large figures, sometimes as high as 1,500% APR. Personal loans and mortgage rates are almost always significantly lower than this.
Is debt consolidation a good idea?
Debt consolidation is often seen as a less stressful option too. Rather than trying to juggle lots of monthly payments, you’ll be dealing with one monthly payment to one lender.
Although a reduction in monthly payments and interest rate might sound appealing, there’s some maths to do before you can say whether you’ll actually work out better off.
So, how does debt consolidation work with your mortgage?
A mortgage is a secured loan that uses your house as ‘security’ for the lender. Put simply, this means that if you ever stop paying, the mortgage provider can always take possession of your home so they’re never out of pocket.
To be confident their security will always cover what’s owed, mortgage lenders will always work with a maximum ‘loan-to-value’ figure. This figure depends on the lender – but it’s usually between 75% and 85% of your home’s value.
Loan-to-value example
For example, if your home is worth £100,000, a lender with a 75% loan to value mortgage deal will let you borrow £75,000.
When you first move into your house, this means you’ll need to find a £25,000 deposit – then you’ll make a monthly repayment on £75,000.
The thing is, house prices don’t stand still. So, if your house was worth £100,000 when you bought it but the value is now £150,000 – the lender may consider extended what you borrow to represent 75% of that new figure – which is £112,500.
As you can see, this is significantly more that you were first able to borrow. At the moment, around 81% of UK lenders are happy to increase people’s mortgage amounts so they can free up some of this extra money (often referred to as ‘equity’) to pay off debt they have elsewhere – including credit card debt, unsecured personal loan debt, payday loans, and other unsecured debts.
What are your options when you increase mortgage borrowing to pay off debt?
If you decide to reduce debt repayments by borrowing extra money against your home, you have a few different options:
- A further advance
- A remortgage
- A second mortgage
Let’s take a look at each in more detail:
1. Take a ‘further advance’ (borrowing more money from your current mortgage lender)
If you talk to your existing lender about borrowing more money against your home, they’ll refer to this as a ‘further advance’.
Usually, you’ll have to go through a similar process to the one you went through when you first got your mortgage – an affordability assessment, checking your credit score and credit history, and possibly even another property valuation/survey. However, you usually won’t need to instruct a solicitor or conveyancer – which helps to keep costs down.
Since there are often fewer fees associated with a further advance, this is often seen as the easiest option. As such, you might not get the best rate from your lender – they’re often reserved for attracting new customers.
2. Remortgage (switch to another deal or another lender)
When you remortgage, you effectively start the mortgage process again – either with a totally new mortgage lender or a different deal with your current mortgage provider.
Again, like a further advance, you’ll be expected to go through an affordability assessment, credit check, and property valuation. If you’re staying with your current lender you may not need to employ a solicitor – but you almost certainly will if you’re swapping to a new lender.
Remortgaging will mean you get to choose from available mortgage products again – so you can potentially choose the best rate for your circumstances. However, remortgaging is likely to push up your ‘loan-to-value’ so you might not qualify for the low interest deals designed for low loan-to-value customers.
3. Take a ‘second charge’ mortgage (an additional secured loan from another lender)
A ‘second charge’ mortgage is an additional mortgage loan that’s based on how much equity you’ve got in your home.
The easiest way to think about this is with an example.
Let’s say your home is worth £100,000. If you’ve paid your current mortgage debt down to £50,000, then you have an additional £50,000 which is ‘equity’. A second charge product will only lend against this equity figure (since the rest of the house’s value is tied to the other mortgage). So, if they’re willing to offer a 75% loan-to-value mortgage, you could borrow 75% of £50,000 – which is £37,500.
Not all lenders (both your current mortgage lender and new lenders) are willing to work with second charge products – so you’d need to check if this is an option before you explore too far.
What about new buyers? Can you borrow extra to deal with debts?
Since 2020, the UK property market has seen a bit of a boom – with houses often fetching their market value or above when they go on sale.
This has made lots of new buyers wonder if they can borrow above and beyond what their property is worth, so they clear debts and benefit from low interest rates.
In short, the answer is no.
This is because mortgage providers don’t like risk. Property values may look like they’re consistently moving up – but if a lender gave a loan of more than their usual loan-to-value cap, then they wouldn’t have enough security to cover what they were owed if there was ever a reason you couldn’t make payments.
Additional borrowing on mortgage to clear debt: Pros and cons
As we mentioned at the beginning of this guide, there are lots of pros and cons to think about if you’re considering consolidating debt with a mortgage product.
Pros
You’ll be able to free up a lot of money quickly
If you’re really struggling with debts, being able to clear them before you run into legal trouble (such as CCJs or court enforcement action) can be an enormous relief.
Often, a borrowing money against your home is the quickest way to do this. However, it’s not the only way. There are debt solutions that exist that could stop your creditors chasing you and wouldn’t involve selling or remortgaging your home.
You free up other lines of credit
Whether you see this as a pro or a con will depend on how you manage your money – but paying off current unsecured debt (such as credit card bills and other debts) will mean you have that line of credit available again.
If there’s an emergency to pay for, then this can be helpful – but if you’re not very careful, having an increased mortgage and access to lots more credit can cause serious problems.
Therefore, we’ve also started our list of ‘cons’ with this same point…
Cons
Your credit is freed up again
As we’ve just mentioned, there are plus sides to freeing up your lines of credit – but for most people, this belongs firmly in the ‘cons’ list.
You can’t keep rolling debt into your mortgage deal – and even if you wanted to, most lenders won’t keep doing it for you. Therefore, you need to be extremely careful not to get back into the position you found yourself in in the first place.
Cutting up credit cards and reducing overdrafts at this point is a good idea – because you won’t be tempted to fall back into using them. If you do, you could end up with increased monthly repayments on your mortgage – as well as many other unsecured lending debts taking up a large portion of your income.
Paying off debts with mortgage lender can be a very expensive option
On the face of it, a lower interest rate is better than a higher interest rate.
Unfortunately though, things aren’t that simple. There’s another important factor to consider – your repayment term.
The average UK household has just under £15,000 of unsecured debt. Most of this unsecured borrowing is done over a period of between 2-7 years – whereas mortgages tend to be over 20-25 years.
So, if you pay off £15,000 with a rate of 15% over 3 years, you’ll end up paying around £3,750 in interest. However, if you roll that debt into your mortgage and pay it off at 4% over 20 years, you’ll end up paying £6,750 in interest – not far off double what you would have been paying back originally.
Remortgaging to pay off debt might feel like you’re giving yourself breathing space – but, a lot of the time, it only makes for a more expensive problem into the future.
Remortgaging might not be possible if you have a poor credit score
If you’re already struggling with debt and you’ve missed payments – you might find that your credit score has already been damaged.
A lower credit score can sometimes prevent you from remortgaging – as lenders will consider you a more risky customers. As we already know – lenders don’t like risk.
Even if they will lend to you, problems with repayments on your credit file might mean you get a worse interest rate – which can significantly increase the amount of money you’ll be paying back in the longer term.
There could be better unsecured options
Lots of people automatically assume that their mortgage is the cheapest way to borrow money – but, as we’ve already explored, this often isn’t the case.
If you can sit down and do the maths around how much interest you’ll pay on your debt if you add it to your mortgage, you might find that there are better priced unsecured products out there for you. Sure, it’s one more payment on top of your mortgage – but since the average person in the UK usually owes at least 5 different creditors, that’s still less pressure.
There could be penalties to pay
Lots of people are on mortgage deals and secured loans that come with a ‘redemption penalty’. This means that if you want to end your mortgage deal before a price-cap or fixed-rate period ends, you could have a penalty to pay.
In some cases, these penalties are thousands of pounds – which could leave you significantly worse off than just sticking with the debt where it is.
It’s possible you could end up in negative equity
Fortunately, negative equity isn’t something that’s very common today – but that doesn’t mean it couldn’t happen.
You could find yourself in negative equity if the price of your home suddenly went down. Basically, you’re in a negative equity situation if you owe more than your house is worth.
The more money you borrow against your home, the more vulnerable you are. There have been situations in the past where people cannot sell their homes because they cannot settle the debt with their mortgage lender.
Loading debt into your mortgage should only be a one-time thing
Adding debt to your mortgage might feel like an easy way of wiping the slate clean, but actually, it’s going to significantly increase the amount you’ll pay back over the life of your mortgage.
What’s more, there are likely to be additional fees to pay, it could damage your chances of getting better deal in the future – and there’s a chance that it will limit your options if you move home.
As such, most money experts will recommend that it’s something you only do once – and many will recommend against it altogether if there are alternatives.
In reality, you’re not wiping the slate clean – and if you think about it like this, it can be dangerous. If you find yourself spending beyond your means in the future, you end up with no remortgage options and a large amount of unsecured debt – which can be seriously life-limiting.
Alternatives to borrowing on your mortgage to clear debt
When people are really struggling with debt, priorities change. The idea that you’re adding large amounts of interest onto yourself in the future will often come as distant second to the idea that you’ll get creditors off your back in the here-and-now.
The thing is, borrowing money on your mortgage isn’t the only way to deal with these problem debt. There are alternatives.
Alternative 1. Talk to your lenders
It might feel like it now, but you’re not the only person who’s struggling with debt and wishes they could get themselves some breathing space. Around 1 in 6 of us have problem debt – and creditors are used to finding ways of working with people who are struggling.
The sooner you can get in touch with the people or companies you owe money to, the better. Often, they’ll be able to come to agreements that help you get your repayments down to more manageable levels. This will almost always have the debt dealt with quicker than adding it to your mortgage too.
Alternative 2. Explore debt solutions
Some debt solutions – like bankruptcy – can have a serious impact on your home. However, there are plenty of debt solutions that won’t affect your home – and Individual Voluntary Arrangements (IVAs) often fall into that category.
If you cannot see a way to keep you head above water with your debts – it’s often worth looking at government-approved debt solutions before you add a lot of money to your mortgage that you’ll be paying off over 20+ years. Not only do some debt solutions keep your monthly payments to an affordable level – they’ll also write-off anything that you still owe when the debt solution ends. That’s something no mortgage lender will never offer.
