Remortgaging for debt consolidation allowed some homeowners to move selected credit commitments into a larger mortgage during 2021.

Mortgage borrowing costs were comparatively low for much of the year. However, transferring short-term debts to a mortgage did not automatically reduce the total cost.

Borrowers still needed to consider:

• Available property equity
• The new loan-to-value
• Mortgage affordability
• Early repayment charges
• Product and legal fees
• The revised mortgage term
• The total amount repayable
• The risk of securing previously unsecured debts against their home

A smaller monthly payment could create immediate breathing space. However, repaying the debt over a longer period could increase the overall interest charged.

What Did Remortgaging for Debt Consolidation Mean in 2021?

Remortgaging meant replacing an existing mortgage with a new mortgage secured against the same property.

For debt consolidation, the new mortgage included additional borrowing. That money could then repay agreed credit cards, loans, overdrafts or other commitments.

For example, a homeowner might have owed £180,000 on their mortgage and £20,000 across several credit agreements.

They could have applied for a new mortgage of £200,000, subject to the lender’s valuation, affordability checks and criteria.

This would not have removed the £20,000 debt.

Instead, it would have changed:

• The lender receiving the repayments
• The interest rate charged
• The monthly payment
• The repayment period
• The security attached to the borrowing

The central question was therefore not whether debts could be combined.

It was whether changing their structure produced a lower and sustainable overall cost.

What Did the 2021 Mortgage Market Show?

Mortgage rates remained low through much of 2021.

Bank of England data showed that the effective rate on newly drawn mortgages fell to 1.83% in July 2021. The effective rate on outstanding mortgage balances fell to 2.05%.

These rates helped create a clear difference between mortgage pricing and many forms of unsecured borrowing.

However, low mortgage rates did not remove the risks of extending short-term debts across a longer mortgage term.

Remortgage activity also strengthened towards the end of the year.

The Bank of England recorded 44,900 remortgage approvals with a different lender in December 2021. This was the highest monthly figure since February 2020.

Consumers also borrowed an additional £0.8 billion through consumer credit in December 2021. This followed a period in which household borrowing patterns had been affected by the coronavirus pandemic and changing restrictions.

These statistics do not show how many mortgages were used for debt consolidation.

They do, however, show the market conditions surrounding the decision:

• Mortgage rates were comparatively low.
• Remortgage activity was increasing.
• Consumer credit borrowing had started to return.
• The Bank of England raised Bank Rate in December 2021.

The decision still depended on the borrower’s equity, income, credit record and total repayment calculation.

Why Did Low Mortgage Rates Not Guarantee a Saving?

The interest rate was only one part of the calculation.

Credit cards and personal loans often carried higher rates than residential mortgages. Moving those balances to a mortgage could therefore reduce the immediate monthly payment.

However, mortgages were generally repaid over much longer periods.

A debt with five years remaining could be extended across 15, 20 or 25 years.

This meant a homeowner could pay:

• A lower interest rate
• A smaller monthly payment
• Interest for many more years
• A higher total amount overall

A monthly reduction could solve a short-term cash-flow problem while creating a longer financial commitment.

The true comparison, therefore, needed to include both the monthly payment and the total repayable.

Illustrative 2021 Cost Comparison

The following example is illustrative and does not represent a particular lender or mortgage product.

In this simplified example, the mortgage route produced a lower monthly payment and a slightly lower total repayment.

However, the calculation could change significantly after including:

• Mortgage arrangement fees
• Legal costs
• Valuation charges
• Adviser fees
• Early repayment charges
• Changes to the rate after a fixed period
• Interest charged across the full mortgage balance

The result would also be different if the unsecured debt could have been repaid sooner.

The lowest monthly payment was not necessarily the strongest long-term outcome.

What Changed at the End of 2021?

The Bank of England increased Bank Rate from 0.10% to 0.25% in December 2021.

This was the first Bank Rate increase since August 2018.

The change did not make every mortgage more expensive immediately. Fixed mortgage rates, lender funding costs and product pricing do not move in exactly the same way.

However, it marked a shift away from the exceptionally low-rate conditions experienced earlier in the year.

Borrowers considering debt consolidation therefore, needed to examine:

• The initial mortgage rate
• How long that rate was fixed
• The lender’s follow-on rate
• The complete mortgage term
• The cost of future refinancing
• Whether payments remained affordable if rates rose

A decision based only on the initial rate could overlook the longer-term risk.

What Would a Lender Have Assessed in 2021?

A lender would normally have assessed the complete application rather than approving additional borrowing based only on property equity.

The review could include:

Income

The lender might consider:

• Basic salary
• Overtime
• Bonuses
• Commission
• Self-employed earnings
• Pension income
• Other acceptable regular income

Income affected the amount that could be borrowed. It did not guarantee approval.

Expenditure

The affordability review could include:

• Household bills
• Childcare
• Travel costs
• Maintenance payments
• Existing credit commitments
• Dependants
• Regular subscriptions
• Other essential expenditure

Debts intended for repayment might be treated differently by lenders.

Credit history

Lenders could review:

• Missed payments
• Defaults
• County Court judgments
• Mortgage arrears
• Credit utilisation
• Recent applications
• Payday loan use
• Debt management arrangements

The date, value and status of a credit problem could affect the available products.

Property equity

The lender would calculate the new loan-to-value after including the additional borrowing.

A larger mortgage meant less equity remained in the property.

Purpose of borrowing

Some lenders restricted:

• The maximum amount available
• The percentage used for debt consolidation
• The types of debt that could be repaid
• Applications involving recent arrears
• Applications showing repeated consolidation

The borrower could also be asked for statements confirming the balances being cleared.

The Main Risk in 2021

The principal risk was the same regardless of the low-rate environment.

Credit cards and personal loans were generally unsecured.

Once included within a mortgage, those debts became part of borrowing secured against the home.

This changed the consequences of missed payments.

It also meant that previous spending could remain within the mortgage long after the original purchase or credit agreement had been forgotten.

Debt consolidation could simplify administration. It did not erase the underlying borrowing.

Government-backed MoneyHelper explains that combining debts may make repayments easier to manage, but borrowers still need to understand the costs and risks.

Your home may be repossessed if you do not keep up repayments on your mortgage or another loan secured against it.