Remortgage to Pay Off Credit Cards

How Remortgaging to Pay Off Credit Cards Works

When you remortgage to pay off credit cards, you are essentially borrowing additional money against the value of your home and using those funds to clear your credit card balances. The process involves either switching to a new lender or renegotiating with your current lender for a larger mortgage that includes the amount needed to settle your cards.

Here is how the process typically unfolds:

1. Calculate your total credit card debt — Add up all outstanding balances across every credit card you hold, including any interest that has accrued. Make a note of the interest rate on each card so you can see exactly how much you are paying.
2. Determine your available equity — Your equity is the difference between your property's current market value and the amount you owe on your mortgage. You will need enough equity to cover the credit card debt you wish to clear while keeping your LTV within acceptable limits.
3. Apply for a remortgage with capital raising — Your mortgage application will specify that you are raising additional capital for debt consolidation. The lender will assess your affordability, carry out credit checks, and value your property.
4. Credit cards are paid off on completion — Once the remortgage completes, the raised funds are used to pay off your credit card balances. Many lenders will pay the credit card companies directly to ensure the money is used for its stated purpose.

The result is that your expensive credit card debt is replaced with mortgage debt at a significantly lower interest rate. Instead of paying 20% or more on your credit cards, you might be paying 4-6% on your mortgage, which translates into considerable monthly savings.

For instance, if you owe 15,000 pounds across three credit cards at an average rate of 22% APR, your monthly minimum payments could total around 450 pounds. By adding that 15,000 pounds to your mortgage at 5% over 20 years, the additional mortgage payment would be approximately 99 pounds per month, saving you over 350 pounds each month.

The Real Cost of Credit Card Debt

To understand why remortgaging to pay off credit cards can be so appealing, it helps to look at the true cost of carrying credit card balances over time.

Minimum payment trap

If you only make minimum payments on your credit cards, it can take decades to clear the balance. The minimum payment on most UK credit cards is set at around 2-3% of the outstanding balance or a fixed minimum (usually 5 to 25 pounds), whichever is greater. On a 10,000 pound balance at 22% APR, making only minimum payments would take over 30 years to clear the debt, and you would pay well over 15,000 pounds in interest alone.

Compounding interest

Credit card interest compounds daily in many cases, meaning you pay interest on your interest. This is why credit card debt can grow so quickly if left unchecked. Even if you are not adding new purchases to the card, the balance can increase month after month if your payments are not covering the full amount of interest being charged.

Impact on your credit score

High credit card utilisation, which is the percentage of your available credit limit that you are using, can negatively affect your credit score. Lenders typically prefer to see utilisation below 30%. If you are close to or at your credit limits, your credit score may suffer, making it harder and more expensive to borrow in the future.

Multiple payment dates

Managing several credit cards means keeping track of multiple payment dates and amounts. Missing even one payment can result in late payment fees, increased interest rates, and a negative mark on your credit report that stays there for six years.

When you consider these factors together, the case for moving credit card debt onto a lower-rate mortgage becomes clear. The key is ensuring that the long-term costs of extending the repayment period do not outweigh the immediate monthly savings.

Eligibility Requirements for Paying Off Credit Cards Through Remortgaging

Not every homeowner will qualify to remortgage for the purpose of paying off credit cards. Lenders have specific criteria that you must meet, and understanding these in advance can help you prepare a stronger application.

Equity requirements

You must have sufficient equity in your property to cover both your existing mortgage balance and the additional borrowing needed to clear your credit cards. Most mainstream lenders cap the total borrowing at 85% of the property value for debt consolidation purposes. Some specialist lenders may go up to 90% or even 95%, but rates at higher LTV levels will be more expensive.

Affordability checks

Under FCA rules, lenders must verify that you can afford the new, higher mortgage payment. They will examine your income, expenditure, and existing financial commitments. The good news is that lenders typically factor in the fact that your credit card payments will cease once the consolidation is complete, which can improve your affordability calculation.

Credit history considerations

Having credit card debt does not disqualify you from remortgaging, but the way you have managed that debt matters. Lenders will look at whether you have been making at least the minimum payments on time. If you have missed payments, exceeded credit limits, or have defaults recorded, your options may be more limited, though specialist lenders may still be able to help.

Property valuation

The lender will need to confirm the current value of your property. If property values in your area have fallen since you purchased or last remortgaged, you may have less equity than expected, which could limit the amount you can raise for debt consolidation.

Loan-to-income ratio

Most lenders apply a maximum loan-to-income multiple, typically around 4 to 4.5 times your annual income. If the additional borrowing would push your total mortgage beyond this threshold, you may need to explore alternative options or consider a lender with more flexible criteria.

A specialist mortgage broker can assess your situation and identify lenders whose criteria best match your circumstances, potentially saving you time and the risk of unnecessary credit searches that could further affect your credit score.

Benefits and Drawbacks of Using Your Mortgage to Clear Credit Cards

Remortgaging to pay off credit cards offers several compelling benefits, but there are also significant drawbacks that you should carefully consider before proceeding.

Key benefits

• Substantial monthly savings — The difference between credit card interest rates (typically 18-30%) and mortgage rates (typically 4-6%) means your monthly payments could drop dramatically. On 20,000 pounds of credit card debt, the monthly saving could easily exceed 400 pounds.
• Single manageable payment — Replacing multiple credit card payments with one mortgage payment simplifies your finances and reduces the risk of missing a payment date.
• Reduced stress — The psychological burden of carrying significant credit card debt should not be underestimated. Knowing that your high-interest debts have been cleared and replaced with a single, lower-cost payment can provide genuine peace of mind.
• Credit score improvement — Clearing your credit card balances can improve your credit utilisation ratio, which is a key factor in your credit score. Over time, this could make future borrowing cheaper and more accessible.
• Fixed payment certainty — If you choose a fixed-rate mortgage, you will know exactly what you are paying each month for the duration of the fixed period, making budgeting much easier.

Important drawbacks

• Total interest cost — Spreading 20,000 pounds of credit card debt over a 25-year mortgage term means you will pay interest on that sum for a quarter of a century. Even at a lower rate, the total interest paid could exceed what you would have paid on the credit cards had you cleared them over a shorter period.
• Converting unsecured to secured debt — Credit card debt is unsecured, meaning your home is not at risk if you cannot pay. Once it becomes part of your mortgage, failing to keep up with payments could result in your home being repossessed.
• Risk of repeating the cycle — Studies show that a significant proportion of people who consolidate credit card debt into their mortgage go on to run up new credit card balances within a few years. This leaves them with both a larger mortgage and new credit card debt.
• Remortgage costs — There may be arrangement fees, legal fees, and valuation fees associated with remortgaging. Additionally, if you are leaving your current deal early, you may face early repayment charges.

To mitigate the drawbacks, consider reducing or closing your credit card accounts after consolidation and ask your adviser about making overpayments on the additional borrowing to reduce the total interest cost.

Strategies to Avoid Rebuilding Credit Card Debt After Remortgaging

One of the biggest risks of remortgaging to pay off credit cards is falling back into the same pattern of spending on credit. Here are some practical strategies to help you avoid rebuilding credit card debt after consolidation:

Close or reduce your credit limits

Once your credit cards are paid off, consider closing accounts you do not need or significantly reducing the credit limits on those you keep. Having high credit limits available can be tempting, and reducing them removes the temptation to spend money you do not have.

Keep one card for emergencies only

Rather than closing all your credit cards, you might keep one with a modest limit strictly for genuine emergencies. Store it somewhere inconvenient rather than carrying it in your wallet, and set up a direct debit to pay the balance in full each month.

Build an emergency fund

Use some of the money you save each month from your lower payments to build an emergency fund. Financial experts typically recommend having three to six months of essential expenses set aside. Having this buffer means you will not need to reach for a credit card when unexpected costs arise.

Create and stick to a budget

Take the opportunity to review your spending habits and create a realistic monthly budget. There are numerous free budgeting apps and tools available that can help you track your spending and stay within your means.

Set up direct debits for bills

Ensure all regular bills are paid by direct debit to avoid the temptation of paying them on credit cards. This also helps you avoid late payment fees and keeps your credit record clean.

Consider overpaying your mortgage

Many mortgage deals allow you to overpay by up to 10% of the outstanding balance each year without penalty. Using the money you have saved through consolidation to make overpayments can help you pay off the additional borrowing more quickly and reduce the total interest cost significantly.

By adopting these habits, you can make the most of the fresh start that debt consolidation provides and avoid the trap of rebuilding the credit card balances that caused problems in the first place.

Getting Professional Advice on Credit Card Consolidation Remortgages

Given the complexity and long-term implications of remortgaging to pay off credit cards, seeking professional advice is strongly recommended. Here is what you should know about getting the right guidance:

Mortgage advisers and brokers

A qualified mortgage adviser, also known as a mortgage broker, can search the market on your behalf to find the best deal for your circumstances. They will assess your total debts, income, equity, and credit history to recommend the most suitable lender and product. Whole-of-market brokers have access to deals from hundreds of lenders, including specialist providers who may not be available to the general public.

FCA regulation

All mortgage advisers in the UK must be authorised and regulated by the Financial Conduct Authority (FCA). This means they are required to act in your best interest and provide advice that is suitable for your individual circumstances. You can check whether an adviser is FCA-authorised by searching the Financial Services Register on the FCA website.

Free debt advice services

If you are struggling with debt, there are several organisations that offer free, confidential advice. StepChange Debt Charity, Citizens Advice, and the National Debtline can all help you understand your options and may suggest alternatives to remortgaging that you had not considered. It is always worth exploring free advice before committing to any course of action.

What to ask your adviser

When you speak to a mortgage adviser about consolidating credit card debt, there are several important questions you should ask:

• What will my new monthly payment be compared to my current combined payments?
• How much will I pay in total interest over the life of the mortgage?
• Are there any fees or charges involved in the remortgage?
• Would I be better off using an alternative method to clear my credit cards?
• Can I make overpayments to reduce the additional borrowing more quickly?
• What happens if I want to remortgage again in the future?

A good adviser will answer all of these questions honestly and transparently, ensuring you have a complete picture before making your decision. They should also explain the risks as well as the benefits, and if consolidation is not in your best interest, they should tell you so.