Debt Consolidation Mortgages

Rather than trying to juggle multiple debts at the same time, a debt consolidation mortgage offers a way of simplifying your finances into one manageable monthly repayment. But is it the right move for you?

In this guide, we'll walk you through everything you need to know about debt consolidation mortgages so you can make an informed decision.

Can You Remortgage to Consolidate Debts?

Yes, it’s possible and is actually quite a common practice. By refinancing your existing mortgage, you can release equity from your home to pay off outstanding debts like credit cards, personal loans, and overdrafts. Instead of managing multiple payments, you'll have one single monthly mortgage repayment.

However, remortgaging involves securing previously unsecured debts against your home. This can lower your overall monthly outgoings, but it also puts your home at risk if you can’t keep up with repayments.

Key Considerations

• Interest rates: Mortgages typically offer lower interest rates compared to shorter-term loans. However, extending unsecured debts over a longer mortgage term may increase the total interest paid over time.

• Secured debt: Consolidating unsecured debts into your mortgage secures them against your property, meaning failure to keep up with repayments could put your home at risk.

• Affordability assessment: Lenders will assess your financial situation to ensure you can afford the increased mortgage payments.

What Debts Can You Consolidate?

A debt consolidation mortgage can be used to pay off various types of debt, including:

• Credit card balances

• Personal loans

• Overdrafts

• Store cards

What Debts Can’t You Consolidate?

Not all debts can be rolled into a mortgage. Some restrictions might include:

• Secured loans: Debts already secured against an asset, such as car loans or second mortgages, can’t be consolidated into your primary mortgage.

• Student loans: These often have specific repayment terms and protections, making them unsuitable for consolidation into a mortgage.

• Tax obligations: Outstanding tax bills are usually not eligible for consolidation through a mortgage.

In addition to the above, certain business loans and gambling-related debts are also typically excluded. However, these restrictions will vary from lender to lender. For example, certain specialist lenders will consider applications to consolidate outstanding tax bills from previous tax years. 

Speaking to a mortgage broker - like us! - is the best way to find the right lender who can help consolidate the type of debts you currently have. 

How Does It Work?

Getting a remortgage to consolidate debt means replacing your current mortgage with a new one for a higher amount. This additional borrowing provides the lump sum you need to repay the debts you want to consolidate. 

As long as you follow certain steps, the process should be pretty straightforward and take around four to eight weeks to complete (depending on the complexity of the application). 

Here’s how it works:

1. Check your equity – Your home’s equity is the difference between its market value and the outstanding mortgage balance. The more equity you have in your home, the more you can borrow for your new mortgage.

2. Work out how much you need to borrow -  Add up the total amount of all the debts you want to consolidate into your new mortgage and add this to your outstanding mortgage balance. 

3. Find the best mortgage deal – You can either stay with your current lender or switch to a new provider offering better terms. Take the opportunity to compare rates and terms from different lenders to see what works for you.

4. Apply for the new mortgage – You’ll need to submit documents like payslips, bank statements, and proof of ID.

5. Affordability checks – Lenders will assess your income, expenses, and credit history to ensure you can manage the new monthly repayments.

6. Property valuation – A lender may want to value your home to confirm how much equity is available.

7. Legal checks and paperwork – If you’re remortgaging with a new lender, a solicitor will handle the legal side, including transferring funds and updating lender details.

8. Finalise your remortgage – Once approved, your lender will release the additional funds you need to pay off your debts.

9. Single monthly payment: You now make one monthly mortgage payment that includes the amount needed to settle your other debts.

Is It More Expensive?

It depends. While mortgage interest rates are usually lower than unsecured loan rates, consolidating debts into your mortgage extends the repayment term. Over time, this could mean you pay more in interest.

Example:

• Credit card debt: £10,000 with an interest rate of 20% over 4 years results in approximately £4,600 in interest.

• Mortgage consolidation: Adding this £10,000 to a 25-year mortgage at 5% interest results in approximately £7,500 in interest.

So, the main consideration should be the overall interest cost NOT the interest rate. 

How Much Can You Borrow?

The amount you can borrow for this type of remortgage will vary from lender to lender, but will largely depend on:

• Your home’s equity – A higher amount of equity means more potential borrowing power.

• Lender criteria and maximum borrowing limits – Some lenders allow up to 90%-95% LTV, while others could be more cautious.

• Your income – Most lenders will consider a mortgage amount equivalent to 4-5 times your annual salary, but this depends on your overall affordability.

For example, if your home is worth £250,000 and your mortgage balance is £150,000, you have £100,000 in equity. If a lender allows borrowing up to 90% LTV, you could potentially access a further £75,000 for debt consolidation.

You may not need as much as this to clear your debts. Even if higher amounts are available, it’s important to stick to the original plan and reasons for remortgaging —the wise move is to only borrow what you need to consolidate your existing debts. 

What Will Lenders Consider?

Lenders will look at:

• Your income and employment status

• Your credit score and history

• Your current debt levels

• Your property’s value and equity

• Your affordability based on income vs. outgoings

A strong credit profile and stable income will improve your chances of approval and also should give you access to the most competitive remortgage rates.

Is It a Good Idea?

It can be—but it’s not for everyone. A debt consolidation mortgage works well if:

• You’re struggling with high-interest debt repayments.

• You have a stable income and can manage your new mortgage repayments.

• You want to simplify your finances with one monthly payment.

• You want to improve your monthly cashflow with lower loan repayments. 

When Might It Be a Bad Idea?

It might not be the right move if:

• Your mortgage deal comes with high exit fees.

• You’re close to paying off your debts anyway.

• You have poor credit, leading to higher mortgage rates.

• You’re planning to move home soon.

Remortgaging to consolidate debt can be a welcome financial reset. If you choose this route, however, it’s important to address any underlying spending habits to avoid another cycle of borrowing. 

Consolidating debts into a mortgage should only be considered if it genuinely saves you money and improves your financial stability.

Alternative Options

If remortgaging doesn’t work for you, consider these alternatives:

• Additional advance: You can approach your existing mortgage lender and request an increase on your current home loan to cover the debt. 

• Balance transfer credit card: Move debts to a lower-interest or 0% interest credit card.

• Personal loan: A fixed-term loan to consolidate debts.

• Second-Charge Mortgage*: A secured loan against your property without remortgaging.

• Budgeting & cutting expenses: Reviewing and adjusting spending habits.

*This service is offered by referral to a third party

Each option has its pros and cons, so it’s worth comparing them carefully before making a decision.