Is using your mortgage for debt consolidation a good idea?
Many of us have at least some debt. In fact, in June 2019, the average British household had just under £60,000 worth, including mortgages. (1)
You can actually use your mortgage to pay off expensive debts like credit cards, as long as you’ve got enough equity in your home.
In order to raise money from a mortgage to pay off other debts, lenders would need to reassess your affordability from scratch to make sure you can afford to make repayments on a bigger loan.
The cost of reducing the interest rate
So, should you use a mortgage to consolidate other debts?
From the perspective of lowering the interest rate you’ll pay, probably yes. This is particularly the case if you have credit card debt, or a personal loan, as these typically have higher interest rates than mortgages.
But the downside to having more mortgage debt is that you’re generally only able to pay it off slowly over a number of years.
This means you could end up paying more in interest over the long term, even if the rate is lower than for other forms of debt.
The risk of repossession and negative equity
The more you increase your mortgage debt, the more you put your home at risk. And if you fail to keep up with repayments, your lender could repossess your home.
There’s also another important issue to consider.
The more you borrow, the more likely you are to end up in ‘negative equity’ should house prices fall. Negative equity is when the size of your loan is greater than your home’s value.
This could result in you being stuck with your current lender and having to pay their Standard Variable Rate - which is likely to be higher - when your initial mortgage rate period ends.
Specialist lenders may charge higher rates
If you’ve previously defaulted on payments, high street lenders will be less inclined to lend you more money.
Specialist lenders are more likely to take a more holistic view of your circumstances, but you could end up paying a higher interest rate.
“You could use a mortgage to consolidate existing debts, especially if you’re paying a higher interest rate with other forms of borrowing,” said Haris Sehic, a Mortgage Adviser at Trussle.
“But whether it’s a good idea to depends on a number of things such as how quickly you can pay off your other debts and how much equity you have.
“We’d recommend getting advice before going ahead to make sure you’ve taken all the risks into account.”