Are you juggling multiple debts with different interest rates, payment dates, and terms?
Many homeowners find themselves stressed by managing various credit cards, personal loans, and finance agreements, each with its own payment schedule and conditions.
Missing a payment can damage your credit score, while high interest rates eat away at your monthly budget.
But if you own a property, you might have a solution right under your roof. Using your home’s equity to consolidate debts could transform your financial situation by rolling multiple debts into one secured loan.
It’s not for everyone and it’s not without risks. Let’s explore how these solutions work and whether they’re right for you.
Important notice: While using property equity for debt consolidation can reduce monthly outgoings, it’s not suitable for everyone. Your home will be at risk if repayments aren’t maintained, and extending debt over a longer period may increase the total amount repaid.
Unlocking Property Wealth to Tackle Debt
‘Capital raising’ for debt consolidation refers to using your property’s equity to pay off other debts.
Equity is the difference between your property’s current value and the amount you still owe on your mortgage. For example, if your home is worth £500,000 and your mortgage balance is £300,000, you have £200,000 in equity.
This equity can be used to clear high-interest debts such as credit cards, personal loans, car finance, and overdrafts.
You can access this equity in three main ways:
- A debt consolidation remortgage – replacing your current mortgage with a larger one
- A second charge loan – an additional loan secured against your property alongside your existing mortgage
- A further advance – borrowing more from your current mortgage lender
When consolidating debts this way, you’re converting unsecured debt into secured debt, which uses your home as collateral.
This fundamental shift comes with both advantages and risks. While secured loans generally have lower interest rates, your home could be at risk if you can’t keep up with the payments.
Read more: What does debt consolidation mean?
Remortgaging to Clear Debts: A Fresh Financial Start
A debt consolidation remortgage involves replacing your existing mortgage with a new, larger one, using the extra money to pay off your other debts.
For example, if you own a £500,000 house with a £300,000 mortgage and have £50,000 of credit card and personal loan debt, you might remortgage for £350,000. This gives you the £300,000 to pay off your original mortgage plus £50,000 to clear your other debts.
The main appeal is the lower interest rates compared to credit cards and personal loans, usually accompanied by a large reduction in monthly outlay.
While a credit card might charge 25% APR or more, and personal loans might range from 7-15%, mortgage rates are much lower, leading to significant monthly savings.
To be eligible, you’ll need sufficient equity in your property (usually at least 15-25%), pass affordability checks, and have a reasonable credit score.
The process takes 4-8 weeks and involves costs such as arrangement fees, valuation fees, and legal expenses.
If you’re still in a fixed-rate mortgage term, consider any early repayment charges, which can be substantial – often 1-5% of your mortgage balance. Sometimes these charges can outweigh the benefits of consolidating but a broker can help you decide.
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Second Charge Loans: Keeping Your Mortgage Intact
A second charge loan allows you to keep your existing mortgage exactly as it is while taking out an additional loan with a new lender, secured against your property.
You’ll have two separate loans secured on your property, each with its own terms and rates.
This approach works well when:
- You have an excellent rate on your current mortgage that you don’t want to lose
- You face hefty early repayment charges on your existing mortgage
- Your circumstances have changed since taking out your first mortgage
- You need funds more quickly than a full remortgage would allow
For example, if you secured a five-year fixed mortgage at 3% three years ago but now need to consolidate £30,000 of credit card debt, remortgaging would mean losing that low rate on your entire mortgage balance.
A £30,000 second charge loan lets you keep your main mortgage untouched while addressing your debt needs.
Second charge loans have higher interest rates than standard mortgages but lower rates than unsecured personal loans. The application process is similar to a mortgage but can often be arranged more quickly – in 2-4 weeks.
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Further Advances
A further advance lets you borrow more from your existing mortgage lender without changing your current mortgage deal.
Since you’re already a customer, the process is usually simpler, with less paperwork and faster approval times – sometimes in just 2-3 weeks.
You’ll deal with just one lender, have one point of contact, and may face lower set-up costs. However, you’re restricted to what your current lender offers, which might not be the most competitive rates on the market.
The interest rate on your further advance will be different from your main mortgage rate, so you’ll effectively have two loan portions with possibly different rates and terms, but all with one lender.
This option works best when you’re happy with your current lender, want a simple process, need funds quickly, or face early repayment charges that make remortgaging expensive.
Further advances can be used for different reasons, such as:
- Debt consolidation
- Home improvements
- Home extensions
- New car
- Family holiday
- Second property
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Why Consolidation Can Make Sense
Consolidating debts through capital raising offers several substantial benefits:
Lower interest rates: Mortgage rates and secured loan rates are generally much lower than credit cards and personal loans. For example, £20,000 of credit card debt at 22% APR costs around £367 per month in interest alone. The same amount at a mortgage rate of 5% would cost about £83 per month – saving £284 monthly.
Simplified finances: Managing one payment instead of multiple debts reduces stress and the risk of missed payments, giving you greater clarity and control over your money.
Improved cash flow: Monthly outgoings are often significantly reduced, freeing up money in your household budget.
Psychological benefits: Clearing multiple debts provides a sense of achievement and a fresh start, breaking the cycle of revolving credit.
Protection from interest rate rises: Consolidating into a fixed-rate mortgage product locks in your repayments for years.
Credit score benefits: After an initial small dip, your score may improve as multiple accounts are closed and you make consistent payments on your consolidated debt.
The Hidden Risks: What You Need to Know
Before proceeding, consider these potential drawbacks:
Your home is at risk: Converting unsecured debt into secured debt means your property could be repossessed if you can’t keep up with the payments.
Total cost over time: Though monthly payments are lower, extending the repayment period significantly can mean paying a lot more interest. A £10,000 personal loan at 10% over 5 years costs about £12,750 in total. The same amount added to a mortgage at 5% over 25 years would cost around £17,500 – that’s £4,750 more despite the lower rate.
Reduced equity: Increasing borrowing against your home reduces your ownership stake, affecting future options like downsizing or equity release.
Arrangement costs: Mortgage fees, valuation costs, legal expenses, and early repayment charges can add thousands to your borrowing.
Borrowing risk: Once credit cards and loans are paid off, it’s tempting to start using them again, creating a double debt situation.
Market volatility: If property prices fall, you could find yourself with less equity or even in negative equity, limiting your future options.
Read more: Why do debt consolidation mortgages cost more in interest?
Is This Right for You? Key Questions to Ask
Debt consolidation through capital raising works best for:
- Homeowners with substantial equity (at least 25-30%)
- Those with stable income who can meet affordability criteria
- People who accumulated debt through one-off circumstances rather than persistent overspending
- Those with good financial discipline who won’t rebuild unsecured debt
- Homeowners planning to stay in their property for at least 3-5 years
It might not be appropriate if:
- You’ve consolidated debts multiple times before
- You have very little equity
- Your income is unstable or likely to decrease
- You plan to move home soon
- You’re close to retirement age
- You’ve already maxed out your borrowing capacity
Other Ways to Tackle Debt
Securing loans and mortgages against your home gives you access to low rates and longer repayment terms.
Some alternative debt solutions include:
Personal loans: Consolidate without securing against your property. Unsecured loans are suitable for smaller debts (£5,000-£25,000) repayable over 3-7 years.
0% balance transfer credit cards: Move existing credit card balances to a card with 0% interest for a fixed period (12-24 months). Requires a good credit score and discipline to clear the balance during the interest-free period.
Debt management plans (DMPs): A debt advice charity negotiates with your creditors to freeze interest and arrange affordable payments. Doesn’t require more borrowing.
Individual Voluntary Arrangements (IVAs): A legally binding agreement lasting 5-6 years, after which remaining debt is written off. Affects your credit rating significantly.
Debt Relief Orders and Bankruptcy: Last resorts for serious debt problems, with significant consequences but providing a fresh start when appropriate.
Capital Raising to Consolidate Debt
Capital Raising to Consolidate Debt
Why a Mortgage Broker Makes All the Difference
An independent mortgage broker can provide valuable assistance by:
- Accessing specialist lenders not available to the public
- Understanding your full financial situation and recommending tailored solutions
- Knowing which lenders accept debt consolidation and how they assess applications
- Presenting your application in the best light
- Handling paperwork and liaising with lenders, solicitors, and valuers
- Providing calculations comparing different options
- Offering holistic financial advice beyond just finding a lender
While brokers charge fees, these are often offset by the savings they help you achieve through better deals and avoiding costly mistakes.
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Making the Right Choice for Your Financial Future
Using property equity to consolidate debt can transform your finances when done correctly.
The three options – remortgaging, second charge loans, and further advances – each suit different situations. However, converting unsecured debt to secured debt comes with the serious risk of losing your home if payments aren’t maintained.
If you do consolidate, have a clear plan to avoid rebuilding unsecured debt.
The most successful debt consolidations form part of a broader strategy for financial wellbeing, not just a quick fix.
For personalised advice, speak with an experienced, whole-of-market mortgage broker who can assess your specific situation and guide you toward the best solution for your financial future.
Frequently Asked Questions
Capital raising for debt consolidation means borrowing against your property’s equity to pay off other debts such as credit cards, personal loans and car finance. This can be done through remortgaging, taking a second charge loan, or requesting a further advance from your current lender.
It can save you money on monthly payments due to lower interest rates compared to credit cards and personal loans. However, extending the debt over a longer period might mean paying more interest in total, despite the lower rate.
Initially, applying for new credit might cause a small dip in your score. However, clearing multiple debts and making consistent payments on your consolidated loan can improve your score over time, especially if you were previously struggling with multiple payments.
A remortgage replaces your entire existing mortgage with a new, larger one. A second charge loan keeps your existing mortgage unchanged and adds another loan secured against your property. Second charges are useful when you want to keep a good rate on your current mortgage or would face high early repayment charges.
Yes, but it might limit your options. When moving, you’ll need to either repay the mortgage in full or port it to the new property. The increased borrowing might affect how much you can borrow for your next home or what properties you can afford.
Consolidating debt increases your LTV ratio by increasing the amount borrowed against your property’s value. This could affect future borrowing options and the interest rates available to you, as higher LTVs typically mean higher interest rates.
