Remortgaging to pay off debt: when it helps and what it costs

If credit cards, loans or car finance are taking a big bite out of your wages every month, moving them into your mortgage can look like an easy fix. Sometimes it is the right thing to do. Sometimes it costs far more than it saves. Here is how to tell the difference.

How it works

You borrow more against your home, either by remortgaging to a new lender or by borrowing extra from your current one, and use the money to clear your other debts. You're left with one monthly payment instead of several.

Because mortgage rates are usually lower than credit card and loan rates, that one payment is often smaller than the ones it replaces.

Why it can help

• Lower monthly outgoings. Swapping high-interest debt for a lower mortgage rate can free up money each month.
• One payment to manage. Fewer dates and fewer lenders makes it easier to stay on top of.
• A chance to reset. For some people, clearing the cards is what finally lets them get ahead.

What it can cost you

This is the part that is often skipped.

• You can pay more in total. A car loan you would have cleared in three years, spread over the 20 or so years left on a mortgage, can cost much more in interest overall, even at a lower rate.
• The debt is now secured on your home. A missed credit card payment damages your credit file. A missed mortgage payment can, in the end, put your home at risk.
• Charges and fees. Leaving your current deal early can mean an early repayment charge, and a new mortgage can come with arrangement, valuation and legal fees.
• The cards are still there. If the spending that built up the debt doesn't change, it's easy to end up with a bigger mortgage and new card balances as well.

If your credit isn't perfect

Missed payments or high balances don't automatically rule you out. Some lenders specialise in people whose credit history isn't spotless, though their rates are usually higher. That makes it even more important to compare the total cost, not just the monthly payment.

Applying to several lenders yourself can leave marks on your credit file. It is better to find out which lenders are likely to say yes before anything is submitted.

Other options worth comparing

• Borrowing more from your current lender (a further advance), which can avoid an early repayment charge on your existing deal.
• A second charge loan, secured on your home but kept separate from your main mortgage, so your current rate stays in place.
• Clearing the smallest or most expensive debts first without borrowing more, if your budget allows.

Which one is cheapest depends on your current deal, how much you owe and how long each debt has left to run.

Questions to ask before you decide

1. How much will I pay in total, not just each month?
2. Is there an early repayment charge on my current mortgage?
3. What fees come with the new mortgage?
4. Could I clear any of these debts sooner by paying them separately?
5. What will I do differently so the debt doesn't come back?