Can I Remortgage To Pay Off Debts? - HomeOwners Alliance (2024)

When you remortgage to pay off debts it means getting a new mortgage and clearing your outstanding debts at the same time to make your monthly outgoings more manageable. We explain what's involved and what you need to consider first.

How to pay off debts by remortgaging

Many people know one reason to remortgage is to secure a better deal. But did you know it’s possible to remortgage to pay off debts too?

There are two main ways to pay off your debts through remortgaging. You could either:

• remortgage to a cheaper deal, which reduces your monthly mortgage payment, freeing up money to pay off debts, or
• remortgage and in doing so release equity in a lump sum to pay off your debts.

The first option would be ideal as you could use the money saved on your monthly mortgage repayments to pay off your debts each month.

However, the savings may not be significant enough to get on top off or clear your existing debts completely or quickly enough.

Alternatively then, remortgaging and in doing so releasing equity to pay off your debts could make your monthly outgoings much lower. It would mean that instead of paying out on credit card bills and loan repayments each month, you’ll just have your mortgage payment to cover instead.

But it’s not a decision to take lightly. It could involve taking out a larger mortgage and there may be significant costs involved. And while you may save on your monthly repayments, by spreading your debt over the duration of your mortgage it may cost you more overall.

Remortgaging to pay off debts

In order to remortgage to pay off debts, you take out a new mortgage on your current home which includes the outstanding value on the previous mortgage, plus the value of the equity you want to release. You would then use this money you have released to settle your debts.

The idea is that by paying off debts which have high interest rates using a mortgage with a much lower interest rate, your monthly repayments will reduce, making them more manageable. But it means taking out a bigger mortgage, which you shouldn’t do lightly. And there are other costs and risks involved too which we explain in more detail below.

Should I remortgage to pay off debts?

If you’re a homeowner and have debts, there are a number of reasons why remortgaging to pay off debts may be a worthwhile option.

Remortgaging could improve your situation if:

• You’re paying high interest rates on your debts. If you’re paying high interest rates, for example on credit cards, and you shift this debt onto your mortgage, the rate you pay will be much lower. This should make your monthly payments much more manageable.
• You could get a better mortgage deal: If you shop around, you may find you can get a better mortgage deal than you’re currently on. However, you’ll need to factor in any fees you may need to pay, such as an early repayment charge if applicable. It’s a good idea to speak to a fee-free mortgage broker who can work out the full costs and savings for you.
• You’ve built up a significant amount of equity in your home: If you have enough equity in your home, releasing some of it by remortgaging might be the most cost-effective way of paying off the debts, especially if you secure a mortgage with a low interest rate at the same time.

Do bear in mind that when you take equity out of your home, you may get access to fewer mortgage products, depending on what your new loan-to-value is. Loan to value is the ratio between the value of the loan and the current value of the property, expressed as a percentage. For example, if your home is worth £100,000 and you have £30,000 of equity in it, your LTV is 70%. But if you want to release £10,000, you will have £20,000 equity left, so your LTV will be 80%. To find out more, read our guide on What type of mortgage should I get?

Remortgage to pay off debt – are there downsides?

There are lots of other factors to consider before remortgaging to pay off debt:

• You’ll be paying the debt off for a long time – and it could cost more: By consolidating your debt into your mortgage you will be paying off the sum over the duration of your mortgage. So while your monthly repayments may be lower, you will be paying it off over a longer period of time and this could end up costing you more over the lifetime of the mortgage.
• There may be penalties to pay: If you want to switch deals before your current deal ends, you may need to pay an early repayment charge. And this could be a significant amount. So it’s essential you speak to a mortgage broker to find out. It may still be worth your while switching but make sure you’re fully informed before doing so.
• There will be fees to pay: When you take out a new mortgage, you may need to pay product, legal and valuation fees. Again, it’s a good idea to speak to a broker to talk through your options.
• Your home could be at risk: When you take out a mortgage, your home is at risk if you don’t keep up with the repayments. So if you increase your mortgage to pay off unsecured debts like credit cards, the amount of secured debt you have is bigger too.

Debt consolidation mortgages – how do I qualify?

As well as remortgaging to pay off debt, there are numerous other reasons for raising capital when you remortgage. These include funding major home improvements such as a home extension, a new kitchen or for other big costs like school fees.

Each lender will have its own criteria on the maximum they are prepared to lend in each situation. So the amount of equity you have in your home will be a key factor in whether you are able to remortgage to pay off debts.

Plus, you will be applying for a larger mortgage. This means you must satisfy the lender’s affordability checks so that they are satisfied that you can afford the repayments.

If you’re looking for a debt consolidation mortgage and don’t have a huge amount of equity in your property, a specialist lender may be your best bet. However, this may involve paying higher interest rates. So it’s a good idea to chat to a specialist lending brokerwho will go through this with you.

Is further borrowing allowed with your current mortgage deal?

Your current mortgage lender may or may not allow further borrowing. If they do, check the costs and fees involved. You will also be increasing the size of your mortgage by doing this. But it may be an option for you if you are tied into a mortgage deal and will have to pay an early repayment charge if you remortgage.

Can you get a mortgage with outstanding debt?

If you have debt and you’re applying for a mortgage, you may be worried that it will rule you out of being accepted. However, debt won’t stop you getting a mortgage automatically but if it, for example, shows financial irresponsibility your lender will take this into account. If you can prove that you have been managing your debt well and have kept up to date with your repayments, this should increase your chances.

Remortgaging with bad credit

When you apply for a mortgage, the lender will look at your credit file to get an idea of how well you manage debt.

If you’ve ever been declared bankrupt or had a County Court Judgement (CCJ), your credit rating is likely to be poor. And if the lender sees that you have debts and if you are struggling to keep up with repayments this may make it less likely that you will be accepted. Or you may be offered a lower amount and at a worse interest rate. See our guide on Mortgages for Bad Credit

If you want to remortgage to pay off debts and you have a bad credit score, look at ways to improve your credit rating before applying. A specialist lending broker will also be able to help by explaining which lenders are most likely to accept your application. Not only will this save time but it will reduce the chances of your application being rejected. It’s important to note that having multiple failed mortgage applications will damage your credit score even further.

Alternative to debt consolidation mortgages

Before going ahead with a remortgage to pay off debts, it’s worth investigating other alternatives. For example, could you shift the debt onto a balance transfer credit card to get a cheaper rate? You could take out a secured homeowner loan or an unsecured loan. It may be a good idea to take independent financial advice before going ahead so you’re fully informed about your options.

Debt consolidation mortgage providers

When you’re investigating whether remortgaging to pay off debts is right for you, it’s essential that you do your research. It’s a big decision and if it’s done right, it could really improve your current financial situation. But you may find that once you are armed with the facts, you decide it’s not the best option for you. If you speak to a fee-free mortgage broker you will find out more about the process, about which lenders are most likely to accept your mortgage application as well as the costs involved.