Debt Consolidation Mortgage: What to Consider First
While using your mortgage to consolidate debt can have benefits, it should be a last resort because of the risks involved.
If you are a homeowner but have other debts with expensive interest rates, you could consider using a mortgage to bring all your borrowing under one roof. Doing so can improve your cash flow by reducing your monthly repayments.
But because mortgage terms can span decades, this type of debt consolidation can easily end up costing you far more in the long run. And if you fail to keep up with your repayments, you could lose your home.
Mortgages are a type of ‘secured’ loan, where your property gives the lender — not you — security in the event of non-payment. You should be very careful before deciding to add unsecured debt such as credit cards or personal loans to your mortgage. Why? Because while failing to pay unsecured debts wouldn’t automatically put your home at risk, here you'd be turning unsecured debt into secured debt, and failing to pay that could put your home in jeopardy.
So while using a mortgage to consolidate debt can have its advantages, it should be something like a last resort. Before turning here, find out if you’re eligible for other unsecured options for consolidating debt — such as switching credit card debt to a balance transfer credit card or getting a personal loan with a more competitive interest rate.
How mortgage debt consolidation works
There are three main ways to use a mortgage to consolidate debt:
Ask your existing mortgage lender for a ‘further advance’
This is just another way of saying borrowing more money in addition to your existing mortgage. It’s usually only an option if the value of your house has risen and you have equity in the property. If your request is approved, the extra money usually will be loaned at a different rate from your main mortgage, but this could still result in monthly savings compared to a personal loan. Not all lenders allow further advances for debt consolidation, and a good mortgage broker will be able to tell you which lenders may be suitable for your needs. But you may have to pay fees for their help.
Remortgage and increase the size of your mortgage
This involves getting a new mortgage entirely. By borrowing more than your existing mortgage, you use the difference to repay your other debt. Again, you will need to have built up more equity in your home to be eligible for this. You can remortgage with your existing lender or another one. And just like in the case of further advances, not all lenders allow remortgaging for debt consolidation. So using a mortgage broker might help find a suitable deal and lender.
Take out a homeowner loan (also called a second charge or second mortgage)
This is a separate loan from your mortgage but is another ‘secured loan’. Fail to keep up with the repayments, even if you’ve been paying your mortgage in full each month, you could still lose your home. Homeowner loans tend to have higher interest rates than first mortgages and run for shorter periods of time, usually five to 10 years. But they are usually cheaper than personal loans and this is why they can help consolidate debt. These loans are usually provided by specialist lenders and it is wise to take independent advice or debt advice before taking out this kind of loan.
Laura Whitcombe is a freelance journalist, campaigns consultant and co-author of Money Made Easy 2015/16 published by Harriman House. Read more