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Can You Remortgage to Pay Off Debt?

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If you have sufficient equity in your home, you may be able to use this equity and remortgage to pay off debt. This would mean remortgaging for a higher amount than you currently owe on your mortgage.

The idea is that by paying off debts which have high interest rates using a mortgage with a much lower interest rate, your total monthly debt repayments will reduce, making them more manageable.

Remortgaging to pay off debt can be a good reason to remortgage for many people but there are several things to consider and pitfalls to watch out for. Let’s take a closer look.

When I remortgage can I consolidate debt?

You can normally remortgage to pay off debt or for debt consolidation if you:

  • Have sufficient equity in your property
  • Have a good enough credit record to get a new mortgage
  • Are not in mortgage arrears
  • Own a property acceptable to your new mortgage lender as security for the mortgage
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If you want to remortgage for any reason, we would always suggest you speak to a mortgage broker.

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How can I pay off debts by remortgaging?

Having equity in your home means you could remortgage for a higher amount than you currently owe on your mortgage. When the remortgage completes, your new lender will pay off your existing mortgage and the remaining funds will be used to clear the debt.    

Here’s an example:

  • Your existing mortgage: £100,000
  • Current value of your home: £150,000
  • Credit card debt: £10,000
  • Overdraft: £2,000
  • Loan: £1,000

You could remortgage for £113,000. This would give you a loan-to-value (LTV) of 75% which would give you a wide choice of mortgage products.

When the remortgage completes, your existing £100,000 mortgage would be paid off and your new lender would give you £13,000 to pay off your credit card, loan and overdraft debts.

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Why could it be a good idea to remortgage to pay off debts?

Interest rates on mortgages are usually lower than those on credit cards and other loans. For example, a fixed rate mortgage might be about 5% or 6% while the typical credit card charges 18% or 19% APR.

You could also only have one payment to make each month (your mortgage payment) rather than multiple debt payments. This could make budgeting easier.

When you remortgage to release equity, the mortgage lender will ask what the extra funds are for. Using the money to pay off debt is generally an acceptable reason. This means it is usually possible to remortgage if you have credit card debt, or other types of unsecured debt.

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What are the pitfalls of using equity to pay off debt?

It’s not always a good idea to remortgage to pay off debts.

Although mortgages generally have lower interest rates than other types of borrowing, you usually pay off the debt over a longer time period. This means you could end up paying more interest over time.

Remortgaging for a higher amount will also mean larger monthly mortgage payments. You need to be sure you can afford this as your home will be at risk of repossession if you don’t make repayments on time.

In effect you are switching unsecured borrowing (i.e. credit cards) into secured borrowing (i.e. your mortgage). This is quite a risky move, as the debts will now be secured on your home.

You also need to be very disciplined about not running up debts on your credit card or overdraft, or by taking out loans, in the future. If you get into debt again, you’ll have both larger mortgage payments and additional debt repayments to make. 

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Can I remortgage to pay off a Help to Buy loan?

If you bought your home using the government Help to Buy scheme the remortgage process will be different as you will have an equity loan from the government.

As we always advise speak to a broker to help with all things mortgage – we can connect you just hit the button below.

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Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Think carefully before securing other debts against your property.
Individual savings may vary, your savings will depend on personal circumstances.

Last Updated: January 16th, 2023

Phil Spencer

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