It feels like a no-brainer: shift expensive credit card or loan debts onto a cheap mortgage and bazinga, you’re quids in. However, though it may seem simple, done wrong it can end up costing more, risking your home, or putting you in dreaded negative equity.
So here are the six key things anyone planning to shift their debts onto their mortgage needs to know, to help work out if it’s right for them.
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.
So given the choice, with everything else remaining equal, it’s always better for you to have UNSECURED lending so if you can’t repay, your house is safe (or at least it’s much more difficult for them to take it).
And by getting a bigger mortgage to pay off your credit cards and loans, you are effectively converting unsecured debt into secured.
Is it cheaper to cut credit card costs instead?
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
After all, saving money without securing is even better. So first check out the following routes, then compare the best option they give you against the cost of securing.
Balance transfer credit cards.
If 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.
For example, currently, new Barclaycard* customers can shift debts at 0% for 22 months with a 2.9% fee, though the rate jumps to 17.5% representative APR afterwards.
If you’ve already got a Barclaycard, Lloyds* is a shorter 0% for 15 months but with a low 1.5% fee if you shift over £1,500 (then 17.9% rep. APR after). For full help and all the best buys see the Best Balance Transfer guide and Official APR examples.
- Do the credit card shuffle
Even if you’re refused new credit, you may be able to use your existing debts more efficiently. There are a hidden range of existing customer balance transfer deals too. If you aren’t up to your credit limit on all cards, you may be able to utilise these to radically cut costs. Full help in the Credit Card Shuffle guide.
- 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, see the existing loan cost cutting guide for more. (including a calculator)
Of course, if you've a poor credit score this won't always work, and the rate you get may still be high (see the Problem Debt guide for more).
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.
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 bleedin obvious” then beware, as you don’t have enough information to answer correctly.
The cost of a debt is a function of both the rate AND how long you borrow for (the longer it’s for, the costlier it is). It is crucial to factor how long it’ll take you to repay when working out which is cheapest.
After all, a mortgage is effectively just a loan, but over a much longer period - typically 25 years - while cards and loans are usually repaid much more quickly and this has a big impact. If you were to borrow...
So sometimes a higher interest rate repaid quicker can be the cheapest option. Try it for your own situation on this calculator for a rough idea.