The fixed-rate challenge
Fixed-rate mortgages offer certainty and stability, but they come with a significant restriction: if you want to leave the deal before it ends, you will typically face early repayment charges. These charges exist because the lender has committed to providing you with a specific rate for a set period, and breaking that commitment has a cost.
ERCs are usually expressed as a percentage of the outstanding mortgage balance, commonly starting at 3% to 5% in the first year and reducing each year until the deal period ends. On a £200,000 mortgage, a 3% ERC equates to £6,000 — a substantial sum that can easily outweigh the benefits of consolidating debt.
This creates a dilemma for homeowners who are on a fixed rate and want to consolidate debt. The consolidation itself might save money, but the cost of breaking the fix could negate those savings. Understanding your options and calculating the true costs is essential.
Option 1: Pay the ERC and remortgage
In some cases, the interest savings from consolidating expensive debt are large enough to justify paying the early repayment charge. This is most likely when your total unsecured debt is substantial and the interest rates on those debts are very high.
For example, if you have £40,000 in credit card debt at 24% APR, you are paying approximately £9,600 per year in interest alone. Even after paying an ERC of £5,000 to break your fixed rate, consolidating this debt onto a 5.5% mortgage rate would save you roughly £7,400 per year in interest. The ERC is recovered within the first year.
However, this only makes sense when the debt amounts and rate differentials are significant. For smaller debts or lower rate differentials, the ERC will take much longer to recoup, if it can be recovered at all.
Option 2: Take a second charge mortgage
A second charge mortgage sits alongside your existing fixed-rate mortgage without disturbing it. You borrow against the equity in your property through a different lender, and the funds are used to consolidate your debts. Your original mortgage continues on its current terms with no ERC triggered.
This is often the most practical option for homeowners mid-way through a competitive fixed rate. The rate on a second charge will be higher than a first charge mortgage rate, typically ranging from 6% to 10% depending on your LTV and credit profile, but it is still substantially lower than credit card rates of 20% to 30%.
The key advantage is that you preserve the low rate on your existing mortgage for the vast majority of your borrowing, and only pay the higher second charge rate on the smaller consolidation amount. For many borrowers, this works out as the most cost-effective overall approach.
Option 3: Wait for your deal to end
If your fixed rate is ending within the next six to twelve months, it may make sense to wait rather than paying ERCs or taking a second charge. Most mortgage lenders allow you to apply for a new mortgage product up to six months before your current deal ends, locking in a new rate without triggering any early repayment charges.
By timing your debt consolidation remortgage to coincide with the end of your fixed rate period, you avoid ERCs entirely and can remortgage to a new deal that includes the additional borrowing for debt consolidation. This is the most cost-effective route when the timeline works in your favour.
In the meantime, focus on managing your debts as effectively as possible. Make at least the minimum payments on all debts, consider whether any 0% balance transfer options are available for a short-term bridge, and avoid taking on any new debt that would increase the total consolidation amount when the time comes.
Option 4: Request a further advance from your lender
Some mortgage lenders offer further advances to existing customers. This allows you to borrow additional funds on top of your current mortgage without triggering ERCs, because you are not leaving the lender or breaking the deal. You are simply adding to the existing arrangement.
Not all lenders offer further advances for debt consolidation purposes, and those that do may charge a different (often higher) interest rate on the additional borrowing compared to your existing fixed rate. However, because no ERC is involved and the process is typically quicker and cheaper than a full remortgage, this can be an attractive option when available.
How to decide which option is best
The right approach depends on your specific circumstances. Consider the following factors in your decision.
Size and cost of your ERCs
Check your mortgage offer documentation or contact your lender to find out exactly what the ERC would be today. The percentage often reduces each year, so if you are well into your fixed period, the ERC may be lower than you expect.
Total debt and interest rates
The larger the debt and the higher the interest rates, the stronger the case for consolidating immediately even if it means paying an ERC. The interest savings can quickly recoup the charge.
How long until your deal ends
If your fixed rate ends in less than six months, waiting is almost always the best option. If it has three or more years to run, waiting may not be practical if the debt interest costs are unsustainable in the meantime.
Your equity position
Sufficient equity is required for both a remortgage and a second charge. If equity is limited, your options may be constrained regardless of the ERC situation.
Your current fixed rate
If your existing fixed rate is significantly below current market rates, a second charge is usually preferable to a remortgage because it preserves the favourable rate on the majority of your borrowing. If your rate is close to or above current market rates, remortgaging may offer a double benefit: consolidating debt and securing a better rate on the whole mortgage.
The calculation that matters
A broker will compare the total cost of each option over the relevant period. This includes the ERC (if applicable), the interest on consolidated debt under each scenario, the interest on the existing mortgage under each scenario, and all arrangement fees and costs. The option with the lowest total cost is the right one for you, and a proper calculation often produces a different answer than gut instinct alone.
Getting specialist advice
Nesto matches you with an FCA-regulated debt consolidation broker who will calculate the cost of every available option for your specific circumstances. The service is free with no obligation. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.