How Overdraft Charges Work Now
Since April 2020, most UK banks have charged a single annual interest rate on overdrafts, typically around 35% to 40% APR. This replaced the old system of daily fees and tiered charges. For many people, the new rates are significantly more expensive, particularly if you're regularly using a large overdraft.
If you're in a £3,000 overdraft at 39.9% APR, you're paying roughly £1,200 per year in interest charges alone. That's £100 a month just to stand still, without reducing the balance. It's easy to see why clearing this debt is a priority.
Is a Remortgage the Right Solution?
For most overdrafts (typically £500 to £5,000), remortgaging is a heavy-handed solution. The costs of remortgaging — arrangement fees, legal fees, valuation fees — can total £1,000 to £2,000, which may be comparable to the overdraft itself. Spreading a small overdraft over a 25-year mortgage means paying interest on it for decades.
Remortgaging makes more sense if you're consolidating a large overdraft alongside other debts (credit cards, loans), if your current mortgage deal is ending anyway and you'd be remortgaging regardless, or if the overdraft is part of a broader pattern of unmanageable debt that needs a comprehensive solution.
Better Alternatives for Overdraft Debt
Before considering a remortgage, explore these options:
- 0% money transfer credit card — some cards let you transfer money to your bank account at 0% interest for up to 24 months, effectively clearing your overdraft interest-free. You pay a transfer fee (typically 3% to 4%) but no interest during the promotional period.
- Low-rate personal loan — a small personal loan at 5% to 8% would clear the overdraft and be repaid in one to three years, costing far less than either the overdraft interest or a mortgage over decades.
- Overdraft reduction plan — some banks will work with you to gradually reduce your overdraft limit over time, helping you break the cycle.
- Budgeting and cash flow adjustment — sometimes the root cause is a timing mismatch between income and expenses that can be resolved without borrowing.
When Overdraft Consolidation Is Part of a Bigger Picture
If you're consolidating multiple debts into your mortgage and the overdraft is just one element, it makes sense to include it. The marginal cost of adding £2,000 or £3,000 in overdraft debt to a larger consolidation remortgage is small compared to continuing to pay 40% APR on it.
In this case, make sure the overdraft is paid off directly as part of the remortgage completion. Your solicitor can arrange a payment to your bank to clear the overdraft, and you should then ask your bank to reduce your overdraft limit (or remove it entirely) to prevent the balance creeping back up.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.