Can you borrow more money from a mortgage lender to clear debt? In theory, yes – but it depends on the lender and your situation.
Additional borrowing simply means borrowing more money from a mortgage lender, which in turn increases the overall balance of your mortgage loan.
Many people do this to pay for home improvements, pay for school fees, or to consolidate debt. But borrowing more from your lender isn’t always the best or most affordable way to tackle problem debt.
In this article, we explain how additional borrowing works, how to know if you’re eligible, and whether it’s a good idea to use this method to clear your debts.
How does additional borrowing to clear debt work?
If you want to borrow more on your mortgage to pay off debt, you have a few options:
1. Borrow more from your existing lender (also known as a “further advance”)
If you have a mortgage in place, your first port of call might be to borrow more money from your existing lender. This is called a “further advance”.
You’ll need to apply for one, which means a fresh credit check, an affordability assessment, and maybe even another property valuation.
It’s important to note that taking on additional borrowing could make it more difficult to remortgage to a better deal in the future. This is because it increases your loan-to-value (LTV), which is the size of your loan compared to your home’s current value. If your home is worth £200k and your outstanding mortgage is £150k, your LTV is 75% (150/200 = 0.75). Usually, the lower your LTV, the wider your choice of mortgage deals.
Remortgaging means switching your current mortgage deal to another mortgage deal. This can either be with your existing lender or a different one.
When you remortgage, you could apply to borrow more money by increasing your mortgage loan. During the application process, you’ll be asked what the additional money is for – and you might need to provide proof (many lenders won’t allow additional borrowing to fund a new business, for example).
Remortgaging can be a good way to borrow large amounts of money, especially if you’ve built up equity in your property (which is the amount you own once you’ve paid down part of your mortgage loan). Here’s an example:
If your home was worth £200k when you bought it and you have a mortgage of £150k, that means your equity is £50k. If the value has increased to £225k, your equity goes up too – in this case, to £75k. You could then increase your mortgage against that new value (to £175k, for example) and borrow £25k to clear your debt.
Read more: Remortgaging to release equity
3. Take out a second charge mortgage
A second charge mortgage is a type of secured loan that’s only available to property owners. It’s also known as a “second mortgage.”
“Secured” means the loan uses your property as security, which means the lender can repossess and sell your home if you’re unable to repay. By contrast, an unsecured loan has no automatic link to your home. Personal loans and credit cards are typically unsecured.
The amount you can borrow on a second mortgage depends on the amount of equity you’ve built up in your home. So, if your home is worth £200k and your existing (first) mortgage is £100k, your equity would be £100k. You could then borrow against your equity up to a certain percentage – say up to 75% of the equity – but this depends on the lender.
What if you don’t already have a mortgage? Can you borrow more than the property’s value to clear debt when buying a house?
No, you can’t. Lenders are very risk-averse, and they won’t let you borrow more than what a property is worth as a mortgage.
Most conventional mortgages will let you borrow 90% of a property’s value, with the remaining 10% made up of your deposit. Some lenders offer 95% mortgages (which require a 5% deposit), and fewer still provide 100% mortgages (which don’t require a deposit but do need a guarantor – usually a family member – who’s able to step in and make repayments on your behalf if you’re unable to).
Are you eligible for additional borrowing?
Whether you’re applying for additional borrowing from your current lender, remortgaging to a new deal, or taking out a second mortgage, it’s helpful to understand the eligibility criteria.
A mortgage broker, like Habito, can help you get your ducks in a row before you apply for any of the above to clear debt, but generally speaking, lenders will want to know:
- What you can afford to repay: Just like when you applied for your mortgage the first time around, lenders will put you through an affordability assessment. This means they’ll look at your income and outgoings, including debt repayments, essential expenses (like council tax, utilities, and food), and everyday living costs (such as leisure, childcare, and clothing).
- Your credit rating: Lenders will check your credit score and credit history to see if you’re a reliable borrower or if you’ve had problems repaying any money you’ve borrowed in the past.
- The LTV of your current mortgage: Your loan-to-value (LTV) is the size of your outstanding mortgage compared to what your property is worth. The lower your LTV, the less risky you’ll appear to a lender as you own more of your home.
- What happens if things change: Finally, a lender will “stress test” your situation to see if you could keep up with repayments if things change. For example, they’ll want to know if you can make your mortgage payments if interest rates go up or if you get made redundant, take a career break, or grow a family.
Bottom line: is additional borrowing to clear debt a good idea?
On the face of it, borrowing against your property and using that extra money to consolidate debt sounds sensible. In one fell swoop, you could move high-interest debts, like credit cards or personal loans, into a low-interest, long-term mortgage. But it’s not always the right thing to do. There are a couple of reasons why:
1. It could be more expensive in the long run
Even though mortgage interest rates are normally lower than personal loans (and much lower than credit cards), they take longer to pay off. That could mean you end up paying more in the long run.
Let’s look at some numbers:
- Say you have debts of £10,000. You decide to remortgage with 4% interest over 20 years. In the first year, you’d pay £393.93 in interest, and over the 20 years, your total interest would be £4,543.53.
- Now let’s say you take that £10,000 debt and pay it off over 3 years with a personal loan at a higher interest rate of 15%. In the first year, you’d pay a much higher £1,309.29 in interest. However, over the full term of the loan, you’d pay far less interest in total: £2,479.52.
As long as you can afford the larger monthly repayments, using a credit card or personal loan can be a more effective way to clear debt than borrowing more against your property. And that brings us to the second reason why it’s not always a good idea:
2. The debt is secured against your home
When you sweep your debt over to your mortgage, you’re switching unsecured debt to secured debt. This means you’re putting your home at risk if you can’t afford to make your monthly payments. It’s up to you to weigh this risk, and your mortgage lender won’t agree if they think there’s a high chance that you won’t be able to make your repayments, but there are plenty of people who would rather avoid the chance of this happening altogether.
If you’re looking for some independent advice regarding debt management and repayment plans, check out Money Helper. And for advice on all things mortgages, second mortgages and remortgages, Habito can help.