Debt consolidation

Shift debts to your mortgage?

Before you bump up your mortgage debt, check out all the options to raise the cash first. Putting the debt on a low mortgage rate sounds sensible but could actually end up costing more and risking your home.

Whether the additional borrowing’s to pay off debt or pay for a new kitchen or holiday, your mortgage shouldn’t necessarily be the first port of call.

So here are the key things anyone planning to shift their debts onto their mortgage needs to know, to help work out if it’s right for them.

Some points to consider before borrowing more on your mortgage

Whatever the reason you need new finance, borrowing money on your mortgage is not always the cheapest way.

Before you do it please consider the following:


Should you be borrowing money?

Debt should always be planned for and budgeted, so whether you’re borrowing the money to refurbish your kitchen, or to buy a new car, you should always consider how you are going to repay the money borrowed.

If you can plan and budget your savings to pay for your purchase, then this is always preferable. If you can’t, then remember that there are many risks associated with raising debt on your mortgage.

Should you be using your mortgage to raise new finance?

There are four main risks associated with this; it will put your home at risk, it will likely be more expensive than short term finance, you must factor in the change to your mortgage repayments.

  • Your home is at risk with a mortgage A mortgage is a secured debt, and while getting secured borrowing may sound better, it’s the lender, NOT you, who gets the security. This is in the form of its right to take your home if you can’t repay.This security is one of the reasons mortgage rates are much lower than other lending. The fact you have collateral – your home – means if you don’t repay, the lenders’ losses are limited, as it can take your assets.
  • It’s the interest COST not RATE that counts Which of the following costs less? Borrowing £10,000 on an 18% loan, or on a 5% mortgage?If you’re saying “duh, don’t ask the bleeding obvious” then beware, as you don’t have enough information to answer correctly.The cost of a debt depends on both the rate AND how long you borrow for (the longer it’s for, the costlier it is).After all, a mortgage is effectively just a loan, but over a much longer period – typically 25 years.So sometimes a higher interest rate repaid quicker can be the cheapest option.

Is it cheaper to find alternate finance or shift debt elsewhere?

As shifting to secured debt is only worthwhile if you save serious cash, this isn’t simply a question of ‘can I save money by moving my card and loan debts onto my mortgage?’ Instead, you need to work out if shifting debts to your mortgage is cheaper than shifting them to the cheapest new credit card or loan.

  • Balance transfer credit cards.Balance transferIf you’ve existing credit card debts and a decent credit history, balance transfer deals let you shift debts to a new card at much cheaper rates. If you repay in a relatively short time (a couple of years) these will often vastly reduce the cost, undercutting even a mortgage.
  • Shift existing loans.Cutting the cost of loans is much trickier, both as there are small penalties and because loan interest rates have increased over recent years. If your loan rate is very high and your credit score has improved, it may be possible.
  • Take out cheap personal loansIf you’re looking for new finance rather than just cutting debt then consider taking out an unsecured personal loan.

Once you know the cheapest unsecured rate you can get for your existing debts (which may well just be your current situation), it’s time to compare that to the cost of switching debts to your mortgage.

Decided to borrow more on your mortgage?

If you’ve got to this point and still decide to borrow more money on your mortgage, there are options – each has its own pros and cons.

1. Further Advance

Getting your current mortgage lender to lend you more money is called a further advance. It can be relatively quick and straightforward but there are no guarantees your lender will be willing.

The lender will usually:

  • Have a maximum LTV it will let you borrow up to (typically 80-85%)
  • Insist you have had your current mortgage for a minimum of 6 months
  • Have a minimum further advance size (typically £5,000)
  • Want to know what the money is for (and might ask for proof)
  • Require you to apply which involves doing another credit check, affordability assessment and potentially another valuation of your property
  • Require you to put the new borrowing on a separate mortgage rate which is likely to mean arrangement and/or booking fees need to be paid.

2. Remortgage

This is when you repay your existing mortgage by taking out a new mortgage on the same property with a different lender.

The lender will usually:

  • Want to know what the money is for (the lender might want proof that’s what you’re going to spend the money on and is likely to refuse the loan if the money is for funding a business or self-employed activity)
  • Charge mortgage fees (arrangement and/or booking fee)
  • Give you the valuation and legal work for free

Good for:

  • Borrowing larger amounts
  • Paying the money back over a long period of time

Bad for:

  • Borrowers who are tied into a mortgage rate and would have to pay an early repayment charge to leave their current mortgage.  You need to be sure it’s worth paying this.  Especially if you’re on a competitive rate that you couldn’t improve on by remortgaging.
  • Those in a rush as a remortgage usually takes around 6-8 weeks to complete.