Remortgage to pay off debt with bad credit

How lenders typically treat it

A general guide to how the market behaves, not a promise about any lender. Criteria change and every case is assessed individually. See the lender criteria database for named lenders.

Can you remortgage to pay off debt with bad credit?

Yes, in the right circumstances, but the two halves of the question pull against each other. Remortgaging replaces your whole mortgage with a new, larger one, and the extra borrowing repays your cards and loans on completion. Every lender has a policy on adverse credit and a separate, often stricter, policy on borrowing to consolidate debt. You need to pass both.

High street banks and building societies tend to want the last two or three years free of missed payments, defaults or judgments, and several will not lend for consolidation above a certain loan to value regardless of history. That closes the door on most files with recent problems. Adverse credit remortgage lenders take a different approach. They grade each event by its age, its size and whether it has been settled, then set a maximum loan to value and a rate for each grade. Older, smaller, settled issues land in the better grades; recent, larger or unsettled ones may be declined altogether.

Two further points shape the answer. First, whether you are free to move at all: if you are inside a fixed or discounted deal, an early repayment charge, usually a percentage of the balance, can add several thousand pounds to the cost of consolidating and may be the reason to wait. Second, lenders want to see the new borrowing clear the accounts, and many pay creditors directly rather than you. Our guide to remortgaging to pay off debt covers the general process; this page is about how bad credit changes it.

Which lenders consider a debt consolidation remortgage with adverse credit?

Not the names you see advertised on television, as a rule. The mainstream lenders that dominate the remortgage market price for clean credit and decline outside it. Adverse credit remortgaging is served by specialist lenders, many available only through a broker, whose criteria are written around the events on your file rather than against them. Lenders such as Pepper Money and Together are known for adverse credit lending, and a number of smaller building societies consider cases individually rather than by score.

What these lenders typically ask for:

• A clear reason for the credit problems, ideally a life event such as redundancy, divorce or illness that has since resolved.
• Clean conduct since, usually for at least 12 months and often 24.
• No mortgage arrears in the last 12 to 24 months, because you are asking to be trusted with a larger mortgage.
• A loan to value at or below their consolidation cap, commonly 70% to 80%.
• Confirmation that the debts being repaid will be cleared, sometimes by paying creditors directly on completion.

Because each lender draws these lines differently, the practical route is an FCA authorised broker who works across the whole market. A decline from your own lender is not a decline from every lender. Our guide to which lenders allow remortgaging for debt consolidation goes further into the names and their policies, and the lender criteria database records what we last checked and when.

How much can you borrow against your home with bad credit?

The ceiling is set by the loan to value cap, and consolidation caps sit below standard caps. A clean-credit borrower might remortgage to 85% or 90% of the property's value for most purposes, but many lenders reduce that to 80% or 75% when the purpose is repaying unsecured debt, and adverse credit lenders reduce it again. For a bad credit consolidation remortgage, 70% to 80% is a realistic working range, with the lower end applying to more recent or larger issues.

In pounds, on a home worth £300,000 with £195,000 outstanding: a 75% cap allows a new mortgage of £225,000, so £30,000 could be released; a 70% cap allows £210,000, releasing £15,000. If the debts you want to clear come to £25,000, the second scenario does not work, and no amount of persuasion changes the arithmetic. This is why equity is the biggest factor after the credit file itself, and why remortgaging for consolidation becomes hard above roughly 80% loan to value whatever your history. Our guide to how much equity you need works through more scenarios.

Affordability sits on top of the cap. The lender assesses the whole new mortgage payment against your income, usually treating the debts being consolidated as repaid, which helps. It also stress tests the payment at a rate above the one you would start on. Where the affordability assessment or the cap leaves you short, a secured loan alongside your existing mortgage can sometimes reach a higher combined loan to value, which brings us to the question of cost.

What would a bad credit consolidation remortgage cost?

Two things separate the cost from a clean-credit remortgage: a rate tiered by the severity of the adverse credit, and fees that may include a higher arrangement fee, plus any early repayment charge on your current deal. The example below uses the fixed illustrative remortgage rate applied across this site and looks only at the £20,000 of debt being added to the mortgage, so that the comparison is like for like. A specialist lender may quote a higher figure than this.

The monthly outgoing on those debts falls from £532 to £136, but the £20,000 costs £32,748 to repay because it now runs for 20 years alongside the mortgage. At a higher adverse credit rate the monthly figure rises and the total rises with it. Two more costs matter in this situation. If you leave a fixed deal early, the early repayment charge is paid up front or added to the new loan, and it can absorb a year or more of the monthly reduction. And because the whole mortgage moves to the new lender, the adverse credit rate applies to your existing balance too, not just the £20,000. A qualified adviser will show you the total cost of both routes, fees and exit charges included, before you commit to anything.

When is a secured loan the more realistic route?

Often, when credit is the problem. A secured loan, also called a homeowner loan or second charge mortgage, sits behind your existing mortgage rather than replacing it. Three things follow that matter with bad credit.

First, your current mortgage stays exactly as it is, so a competitive rate on the existing balance is not lost and no early repayment charge is triggered. Second, the second charge market is built around adverse credit in a way the first charge market is not: more lenders, more tiers and, at some, a willingness to consider unsatisfied judgments or a recently completed arrangement that no remortgage lender would look at. Third, combined loan to value limits in the secured loan market are often a little higher for the same credit profile, which can be the difference between raising enough and falling short.

The trade-off is the rate. Secured loan rates are generally higher than remortgage rates, so on the same £20,000 the monthly payment and the total are higher. Where a remortgage is available at a sensible rate with no early repayment charge, it will usually cost less. Where it is not, the secured loan is the realistic route, and the honest comparison is against carrying on with the cards and loans. Our secured loans with bad credit page sets out what lenders consider, and our secured loan versus remortgage comparison weighs the two side by side.

Whichever route you take, the borrowing is secured on your home, and your home may be repossessed if you do not keep up the repayments. If the new payment only works when everything goes right, free and impartial advice from MoneyHelper, StepChange or Citizens Advice comes before either option.

What improves your chances

• Check all three credit reports (Experian, Equifax, TransUnion) and dispute anything inaccurate before an application is made.
• Let time pass where you can: an issue crossing the 12 or 24 month line moves you into a better lender tier.
• Settle outstanding defaults and CCJs, and keep the paperwork, since a satisfied entry is treated very differently from an open one.
• Keep your mortgage payments spotless. Recent mortgage arrears are the one issue almost no consolidation lender will lend around.
• Check when your current deal ends and what the early repayment charge is, so the timing can be planned rather than forced.
• Use a broker who covers adverse credit lenders, and give them the full picture so they can place you first time.

Alternatives worth considering

If a remortgage is out of reach, a secured loan from a specialist second charge lender is the closest alternative and often the better fit for imperfect credit; see secured loans with bad credit. If your own lender has declined to lend you more, our guide to what to do after a decline explains the options. And if the debt is unmanageable rather than merely expensive, a debt management plan or an IVA arranged through a free debt charity may be the more honest answer than borrowing more against your home; our comparison of consolidation and an IVA sets out the differences.