Debt Consolidation Loans: Is It Wise to Wrap Your Credit Cards into a Remortgage?

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Managing high-interest unsecured debt can quickly become a major financial strain. Between store cards, personal loans and credit cards charging high variable APRs, monthly repayments can consume a large proportion of your income.

For homeowners with substantial equity, consolidating short-term debts into a low-rate mortgage can feel like an ideal solution. Combining multiple debts into a single monthly payment does immediately reduce your outgoings. Securing short-term debt against your home carries long-term risks, though, and the answer is not the same for everybody.

If you are struggling to meet payments right now, speak to StepChange, National Debtline or MoneyHelper first. Their advice is free and impartial, and for some people the right answer is not a remortgage at all.

How It Works

You apply to increase your mortgage and use the extra borrowing to clear the unsecured debt.

Say you owe £200,000 on a £350,000 property, which is 57% LTV, and you have £25,000 across two credit cards at 22% APR and a personal loan at 11%. Remortgaging to £225,000 at 4.5% clears the lot and takes you to 64% LTV, leaving one payment instead of four.

Watch the LTV. That move stays inside the same band with most lenders, but if the extra borrowing pushes you into a higher one, the worse rate applies to your whole mortgage rather than just the new part. That alone can cancel out the savings.

The Case for It

Mortgage rates sit far below credit card rates, so replacing 20% interest with 4.5% cuts your monthly outlay sharply. You get one payment instead of several. And clearing your card balances drops your credit utilisation, which usually helps your score, though your total debt rises at the same time so the net effect is not always positive.

The Cost Nobody Mentions

Your monthly payment falls. The total you pay usually goes up.

Credit cards are built to be cleared in a few years. Mortgages run for 20 to 30. Spreading £25,000 across 25 years means more interest overall, even at a much lower rate.

Take that £25,000 at 20% APR. Clear it in four years and you pay £761 a month, about £36,500 in total. Consolidate it into your mortgage at 4.5% over 25 years and the payment drops to £139, but the total climbs to roughly £41,700.

Neither of those is where most people actually are, though. On minimum payments only, that same £25,000 takes around 26 years to clear and costs somewhere near £61,000. Finding £761 a month is what clears card debt quickly, and anyone who could do that comfortably probably would not be reading this.

So consolidation sits between the two. Cheaper than minimum payments, dearer than clearing it fast, and secured against your home rather than not.

What to Watch

Your home is now on the line. Card debt has no claim on your property. Once it is in your mortgage, it does.

Early Repayment Charges. If you are partway through a fixed rate, leaving early can cost thousands. On a £200,000 balance a 3% charge is £6,000, which swallows the whole saving. Check your current deal before anything else.

The cards fill up again. Consolidation deals with the symptom. Without a budget behind it, plenty of people end up with the mortgage and the card debt.

Lenders are fussy about this. Many cap how much they will allow, some insist your solicitor pays the creditors directly, and a few will not lend for consolidation at all.

Other Routes Worth Checking

A further advance is extra borrowing from your existing lender on its own rate. Your current deal stays put, so no Early Repayment Charge and no legal work. Usually the cheapest option if they will offer it.

A second charge mortgage is a separate loan behind your existing one. Rates are higher, but again your main mortgage is untouched, which matters if you are on a good rate.

A 0% balance transfer card clears the principal interest-free during the promotional period. Suits smaller balances and a strong credit file. Expect a 2% to 4% fee, a limit well under £25,000, and a sharp rate rise at the end.

An unsecured personal loan keeps the debt short-term with no charge over your home. Dearer than a mortgage, far cheaper than cards.

Overpaying is the one people forget. If you do consolidate, overpay the difference and clear the consolidated amount in three to five years rather than twenty-five. Most lenders allow 10% a year penalty-free.

So Is It Wise?

It depends where you are. With equity, a stable income and the discipline to overpay, it is a sensible way to get back in control. Take the lower payment, overpay the difference, clear it on something close to the original timescale.

If you are consolidating because you cannot meet the payments at all, be careful. You are turning a debt that cannot take your home into one that can. That is the point where free debt advice is worth more than a mortgage broker.

Either way, work out the total cost rather than the monthly saving, and find out what leaving your current deal would cost before you move.

Your home may be repossessed if you do not keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority.

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