Shift debts to your mortgage?

Beware, it's not the easy saving it seems

Putting your debt on a low mortgage rate sounds sensible but could actually end up costing more, risking your home, or putting you in DREADED negative equity. Whether the additional borrowing's to pay off debt or fund home improvements or a holiday, your mortgage shouldn't necessarily be the first port of call. The problem isn't that it's wrong per se, but the issue is many people see it as a no-brainer solution. 

Three things to consider BEFORE borrowing more on your mortgage

Whatever the reason you need new finance – such as to clear debts or fund home improvements – borrowing money on your mortgage is not always the cheapest way. And as this guide will explain, while additional mortgage borrowing may seem an easy option, doing so will put your home at risk. 

It's something that you should only ever do as a last resort. So before you do it, consider these three key things:

1. Should you be borrowing money in the first place?

Debt should always be planned for and budgeted. Whether you're borrowing the money to refurbish your kitchen or carry out other home improvements, or to buy a new car, you should always consider how you are going to repay it.

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 – it will not be a cheap option!

A word of warning: if your intention for borrowing money on your mortgage is to pay off existing debt (also known as 'debt consolidation'), don't do it. Instead read our Debt problems guide for help on what to do if you're in a debt situation.

2. Should you be using your mortgage to raise new finance?

There are four main risks associated with using your mortgage to raise new finance, which are...

- Your home is in danger 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). By taking out additional borrowing on your mortgage (in other words, increasing the size of your mortgage) to pay off your credit cards and loans, you are effectively converting unsecured debt into secured.

- 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). It's 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. For example, if you were to borrow...

So sometimes a higher interest rate repaid quicker can be the cheapest option. Do note though, if you factor in inflation – which means the value of money diminishes over time – then paying more in the future doesn't hurt as much.

Try it for your own situation in the calculator below for a rough idea.

- If you shift debts to a mortgage, keep up current repayments. Please don't interpret this guide as saying 'never shift debts to a mortgage'. There are a number of circumstances where consolidating debt on a mortgage will save you cash. Rather, the bigger message is to prevent people thinking it's a no-brainer. If you take the plunge, while it's tempting to see it as a way to reduce your monthly outgoings too, be very wary of that, as reducing your monthly payment could seriously increase the long-term cost.

This is best explained by some simple numbers...

The situation BEFORE shifting

TABLE_CELL_STYLE Mortgage Credit card
Debt £100,000 10,000
Fixed Monthly Repayment £585 £295
Interest Rate 5% 18%
Time Until Repayment 25 years 4 years
Total Interest Cost £75,500 £4,100

So that's a total cost of £80,000 in interest. Now let's say we use the mortgage to clear the credit card debt:

The three possible situations AFTER shifting

Repayments set at level of old mortgage only
Scenario 2: 
Repayments set at midpoint between scenarios 1 and 2
Scenario 3: 
Repayments kept at total level of old mortgage & credit card
Debt £110,000 £110,000 £110,000
£585 £735 £885
5% 5% 5%
Time Until
31 years 19.5 years 14.5 years
£106,500  £62,000 £45,000

You can see the difference between the two is huge. In scenario one, if you just moved the cards to your mortgage and kept the same mortgage repayment, you'd end up paying over £25,000 more in interest than keeping them separate, because it would take you so much longer to repay the whole amount.

Yet if you kept up the same total repayments (mortgage plus credit card added together) as in scenario three, you'd nearly HALVE your interest costs.

Question: surely that beats shifting it to a credit card?

If you're looking at scenarios two or three in the above table and thinking, "Wow, amazing saving! Surely shifting the debt to a credit card wouldn't beat that?", hold fire. We need to compare like with like.

The equivalent to this situation is this: you shift your debt to a cheaper credit card, then once you've cleared the card you add those extra repayments to your mortgage and start overpaying it anyway. The results of that would be similar (or often even better) than scenario three.

- Only ever do this once. This is less of a practical point and more a warning. Shifting debts onto your mortgage can be quite a psychologically easy thing to do. Many feel like the problem debts have simply disappeared as there's no card or loan company chasing.

It therefore risks becoming a habitual pattern to clear cards with the mortgage, then start spending on them again, and clear again and again. In the past, many thought house price growth would cover the debts for them – some of those people are now in negative equity (in other words, trapped as their mortgage is higher than the value of their home). So here's our warning:

Putting your debt onto your mortgage is spending your house, keep doing it and you may have not a brick left.

Martin once met a couple who'd inherited a house and then got a mortgage out to clear some of their credit cards. Once that habit started, they kept doing it until they ended up selling the place and coming out with nothing. So...

  • If you do shift debts onto your mortgage, think of it as a serious thing to do and a dead end for that type of borrowing. Once the cards are clear, it's time to consider cancelling them and cutting them up.

  • Of course, if you've a poor credit score this won't always work. So 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.

3. 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

After all, saving money without securing is 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 full help and all the best buys see our Best balance transfer guide.

- 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 our Credit card shuffle point.

- 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).

- Take out cheap personal loans. If you're looking for new finance rather than just cutting debt then consider taking out an unsecured personal loan. Rates are around the lowest we've ever seen, so for more information on this, including the best current rates for your needs, have a look at our Cheap personal loans guide

Remember to always Check your credit score first if you're thinking of applying for a new loan. If it's bad, it'll be harder to secure a loan.

Decided to borrow more on your mortgage?

If you've got to this point and still decide in favour of additional borrowing on your mortgage, there are three main options – each has its own pros and cons. See which one might work best for you....

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 (these can cost £100s)

Don't assume your lender will automatically let you consolidate debt or raise new finance on your mortgage. Even if it does, you must consider the impact on your ability to remortgage in future (getting a new deal either for moving house or to cut costs – see our Remortgage guide).

There are other things to watch out for too. These include:

  • Your credit history. Even if your credit history was good enough to get a mortgage initially, it may not be good enough now as lenders' criteria change. If your circumstances have changed for the worse, for example your salary has fallen or you have more debt or outgoings now, this could also hurt your chances.

  • Your loan to value. Often abbreviated to LTV, loan-to-value refers to the size of your borrowing compared to the current value of your home. The lower the LTV, the better mortgage deal you are usually able to get. Don't be surprised if lenders refuse a further advance if your LTV is too high, or make you pay for a new house valuation (if your home's value has dropped, that unfortunately increases your LTV, as the loan's then a bigger proportion).

  • Your salary. If your salary has dropped since you took out the mortgage, you may also struggle to convince a lender to extend your mortgage borrowing.

Even if the lender allows it, a further advance could end up increasing the cost of your mortgage in future, which defeats the gain.

As a rough rule of thumb, mortgages get cheaper at each of the following barriers: 60%, 75%, 80% and 90% LTV. If adding debt to your mortgage pushes you above one of those thresholds, it could mean next time you want to remortgage, it'll be costlier. So, any savings on, say, £10,000 debt shifted to the mortgage may be outweighed by the extra cost on £100,000s of mortgage debt itself.

2. Remortgage

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

WARNING! Remortgaging in order to get additional borrowing or consolidate debt is a drastic step to take if you'll be ditching a good product in the process. It rarely makes sense to pay an early repayment charge (which can cost £1,000s) to leave your current mortgage in order to borrow more or clear debts. You need to check your sums carefully to ensure this is the best move for you.

With the help of our Remortgage guide you can find the best remortgage deal for you, and when you apply, you'll need to ask for the amount you need to pay your existing lender plus the additional you want to borrow. 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

Remortgaging can be good for borrowing larger amounts, or repaying the money over a long period of time.                                                                                                               

Other the other hand, remortgaging can be bad for borrowers who are tied into a mortgage rate and would have to pay an early repayment charge to leave their current mortgage. This can cost £1,000s, and 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.

It might not be a good option either for those in a rush, as a remortgage usually takes around 6-8 weeks to complete.

3. Secured Loan (aka 'second-charge mortgage')

Simply put, a secured loan or second-charge mortgage is a loan only available to property owners (or mortgage holders), where the lender can forcibly sell your house to get its money back if you can't repay. The 'secured' bit means the lender gets 'security' – not you. You get the opposite, as if you have problems paying back, the lender can repossess your home.

Whereas a further advance comes from your current lender, a secured loan or second-charge mortgage comes from a different lender entirely.

Is my home definitely safe if I take out unsecured borrowing?

When we normally talk about personal loans from a bank or building society, these are unsecured, which means there's no automatic link to your home (so non-homeowners can borrow this way too).

Sadly it is becoming more common that for those in financial difficulty even unsecured lenders can get what's called a 'charging order' on your home. This is where the term 'second charge' comes in; these lenders will be second in line, after your mortgage provider, on the money from the sale of your house.

This doesn't automatically mean it can push repossession though, there's another court stage they'd need to go for and the courts are much more reticent to grant it on charging orders. Yet even with this, it's much more difficult for lenders to take your home if it's unsecured.

Struggling with debt?

Have a read of these guides if you're struggling financially...

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