Additional Borrowing on Mortgage to Clear Debt – Guide
For free & impartial money advice you can visit MoneyHelper. We work with The Debt Advice Service who provide information about your options. This isn’t a full fact-find, some debt solutions may not be suitable in all circumstances, ongoing fees might apply & your credit rating may be affected.
For free & impartial money advice you can visit MoneyHelper. We work with The Debt Advice Service who provide information about your options. This isn’t a full fact-find, some debt solutions may not be suitable in all circumstances, ongoing fees might apply & your credit rating may be affected.
Are you wondering if you can use additional borrowing on your mortgage to pay off debts? This is a question many people ask, so you’re not alone in this. In fact, over 170,000 individuals turn to our website each month for advice on debt solutions. This guide is here to help.
In this simple and easy guide, we’ll talk about:
- What additional borrowing on a mortgage means.
- How this can be used to pay off debt.
- When it is a good idea to borrow more on your mortgage.
- The process to work out how much you can afford.
- Things you should think about before asking for more money on your mortgage.
Dealing with debt can be hard, and worrying about your mortgage can make it even harder. We know how you feel. We understand your worries about debt and how it might affect your mortgage. Our aim is to help you make the best choices for your situation. We’re here to guide you every step of the way, so let’s get started.
When is it Usually a Good Idea to Get a Further Advance?
It may be sensible for you to get a further advance if:
- You need money for home improvements. Improving your home will increase the value of your property. Thus, in a sense, the further advance will “pay for itself”.
- You need funds for a deposit to buy a second property.
- Buy a share in a freehold to secure more investments
- Buy property/land apart from security
- Home Equity
Is it a Good Idea to get a Further Advance to Pay Off My Debts?
As I mentioned, the situations above are a sensible way to use your further advance.
However, getting a further advance to pay off other outstanding debts is generally not a good idea. To clarify, borrowing more money against a property could put it at risk if you experience financial hardship.
In short, if you fail to make your repayments on time, you could lose your home.
While interest rates on mortgages are certainly lower than most personal loans and credit cards, you may still end up paying a lot more in interest in the long term.
Before you consider getting a further advance to take care of your debts, I suggest that you research other options.
For example, you could try to lower your monthly expenditures so you have more money left over to make monthly payments towards any outstanding debts.
If that doesn’t work, there are other options available which includes:
- An Individual Voluntary Arrangement (IVA)
- A Debt Management Plan (DMP)
- A Debt Relief Order (DRO)
Getting expert advice
If you’re struggling to pay off your debts and you have a mortgage as well, you could you better off seeking professional advice.
I suggest you contact a Financial Planner and get independent debt advice from one of the leading UK charites. StepChange or Payplan both provide essential credit counseling.
They have professionals who could assess your financial situation and provide you with the best debt solutions to suit your circumstances.
Not only that but they will guide you through the process of whatever debt solution you choose.
How a debt solution could help
Some debt solutions can:
- Stop nasty calls from creditors
- Freeze interest and charges
- Reduce your monthly payments
A few debt solutions can even result in writing off some of your debt.
Here’s an example:
Situation
Monthly income | £2,504 |
Monthly expenses | £2,345 |
Total debt | £32,049 |
Monthly debt repayments
Before | £587 |
After | £158 |
£429 reduction in monthly payments
If you want to learn what debt solutions are available to you, click the button below to get started.
What are Some Things to Keep in Mind before Applying for a Further Advance?
If you’ve assessed your situation and you feel that opting for a further advance would be the right decision, then here are some things you should keep in mind:
- Make sure you have a good credit record. You can maintain a good credit score by making regular payments towards your main mortgage debt as well as making punctual payments towards any other debts you may have.
- Ensure that you are comfortable with the additional payments you will have to make once you get a further advance. Being unable to make payments once you get a further advance could even increase your debt.
- Has the value of your home increased since you first took out your mortgage?
- What’s the lender’s APR (Annual Percentage Rate)?
When it comes to mortgage rates, consider the difference between Fixed Rate Mortgages and Variable Rate Mortgages.
A fixed rate mortgage has a rate that’s fixed and therefore won’t change for the time it’s initially fixed for. Whereas a variable rate mortgage has a rate that may increase or decrease over the initial term.
I suggest you shop around for the best deals before deciding on anything. Plus, you should seek advice from an expert before choosing which is best for you.
Also, interest rates, T&Cs and fees can differ between lenders which could impact your decision.
Has your home’s value has increased?
If you find the value of your home has increased since you purchased it, a further advance might be a good option.
However, you should seek advice from an expert who could enlighten you on how much your repayments might increase.
How can I Work out how much I can Afford?
In order to calculate how much you can afford, you have to figure out how much you’ll be borrowing to pay off your debt. Then consider what your additional monthly payments are going to be.
You should contact your mortgage lender to discuss what you have in mind.
Lenders will assess your budget, your expenditure and how much you’ll have to pay in monthly payments. This is called “Debt-to-Income Ratio“.
Your expenditure will include your original mortgage payments, any payments you’re making towards other debts such as credit cards, your living costs, etc.
They will then look at your income to assess whether or not you can afford additional payments towards your further advance.
The lender will ‘stress test’ you by assuming you’d be comfortable with making payments if the interest rates were to increase.
And whether you could still afford the payments should your income decrease or if you were to incur any additional debt.
Mortgage providers will only encourage you to get a further advance if they’re confident you’ll be able to pay it back comfortably.
Please note that most mortgage providers are authorised and regulated by the Financial Conduct Authority. They are not allowed to coerce you into a payment plan you can’t afford.
You should ask your mortgage provider whether the further advance is over the full term of your mortgage. Or whether you can borrow it over a shorter term which would impact the cost of borrowing significantly.
Furthermore, you should ask for the final cost as well as any other fees that may be included with getting a further advance. These fees may vary depending on your mortgage provider.
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Can I Consolidate My Debt with a Further Advance?
While you could consolidate your debt with a further advance, this is generally not a wise decision. You should thoroughly assess your situation before opting for this.
It’s essential that you know that using a further advance for debt consolidation is a sound option financially.
A further advance may have additional costs. Plus, you may not even be able to secure one if your mortgage is already above 80% without a revaluation being carried out which incurs a revaluation fee.
I suggest contacting a debt professional before making your decision. They will assess your finances and inform you of whether or not it would be prudent for you to consolidate your debt using a further advance on your mortgage.
Tips on budgeting and saving
I’ve included some tips on budgeting and saving in the list below:
- Check utility providers for best deals
- Reduce supermarket spending
- Cut your fuel costs
- Cancel subscriptions you don’t need
- Search for discounts
- Review your debts and seek advice
- Consider a balance transfer on credit cards
- Consider a debt consolidation loan
- Look into tax relief and benefits you may be entitled to
Would it be Better to just get a Remortgage?
Getting a new mortgage is also an option that is available to you. However, you must thoroughly assess whether or not this would be worth it. Mortgage refinancing should not be taken lightly.
Remortgaging would include application fees towards the new mortgage provider. Not to mention you will have to pay an early repayment fee to your old mortgage provider.
All of these costs could mean that getting a remortgage could land you in more debt.
Before opting for this option, you should seek advice from a financial expert who could offer crucial advice.
The table below shows a comparison between remortgaging and taking out a personal loan.
Remortgage | Personal Loan | |
Interest rates | Depend on LTV (loan-to-value), but rates tend to be lower than for personal loans | Varies with each lender, size of loan and would depend on credit score. But typically higher than for a remortgage |
Typical term length | 20 to 35 years | 1 to 7 years |
Fees | Would depend on lenders but could be more than £1,000 | Arrangement fee is typically included in the overall APR |
Maximum amount | This depends on loan-to-value | Usually around £35,000 although some lenders will go to £50,000 |
T&Cs of repayment | Your property could be repossessed if you don’t keep up with repayments. Plus there could be fees for exiting early. Also, there’s a risk of overpaying a portion every year | Rates depend on credit scores. Late or missed payments could mean paying more interest which could impact a credit score. Some lenders could offer payment holidays and overpayments |