The home truths of slashing your debt

With British adults running up average personal debts of nearly £4,500, according to research from market analyst Datamonitor, some of us might be tempted to clear the balances on credit and store cards, personal loans and overdrafts by remortgaging our home.

The advantage of extending a home loan to clear debts is that your monthly outgoings can be reduced considerably because mortgage rates are now so low. An added bonus is that you end up with just one payment each month, making your finances more manageable. If you are paying 17.4 per cent interest on a few thousand pounds on your NatWest credit card, for example, you could slash that interest in the short term by transferring the debt on to your mortgage, where rates around 5 per cent are available. But work out how much this will cost you over 20 years and the deal is unlikely to appear as attractive.

So before you contact your mortgage lender to extend your loan, consider whether this is actually the best option.

"Putting your credit card debts on your mortgage might seem a good idea in the short term because you are likely to reduce your outgoings quite significantly," says Simon Jones at broker Savills Private Finance. "This is because the rate of interest on your mortgage will be a lot less than on other forms of credit. But you have to repay this debt over 20 or 25 years and, when you tot it up, you will be paying a horrendous amount of interest.

"If you are prudent and plan to pay a couple of lump sums towards your mortgage over the next few years to reduce this extra debt, the interest will be more manageable," adds Mr Jones. "But if you don't reduce your mortgage and, worse still, remortgage again in a few years to cover more debts, the day of reckoning will eventually arrive."

Handled in the right way, though, remortgaging to clear debts can save you hundreds of pounds, argues Jane Harrison at broker London & Country. "It can be good if you are quite disciplined or have a lot of equity in your home," she says. "The trouble with consolidating your debt on to a personal loan instead of your mortgage is that if you pay it back early, you may be hit with a penalty. But if you choose a mortgage that allows overpayments without penalty, you can pay back what you borrow more quickly.

"For example, if you remortgage with the Nationwide to pay off £3,000 in debts on credit and store cards, you can overpay by £500 a month. So after six months you could have paid it all off. This will be much cheaper than taking out a £3,000 personal loan for several years."

Generally, mortgage experts advise that homeowners should only remortgage to raise more cash if this is to be used to make improvements to their property. That way, increasing the mortgage won't be such a risk because the value of the property will also have risen. Borrowing cash to pay for new curtains or carpets doesn't count; improvements that add value are structural rather than cosmetic.

"Repainting your house may cost you thousands of pounds, but while the result may be attractive to you, it might not add much value to the house," says Mr Jones at Savills. "Extensions, conservatories and extra rooms will do, however."

If you have run up big debts and are considering remortgaging to clear them, there are several other options you should also look into. The simplest approach is to apply for a credit card charging 0 per cent interest on balance transfers for an introductory period - usually six months, although this varies from card to card. Worth considering are Mint, Lloyds TSB, Egg and Nationwide. If you shift your debts on to such a card, you should then aim to chip away at the balance during this six-month period.

But if you don't expect to pay off all your debts within this time, you should remember to switch to another card charging 0 per cent because the interest rate will rise considerably at the end of the offer period.

If you can't be bothered to do this, it may be better to opt for a card levying a low rate of interest until you have repaid the balance. Capital One No Hassle Platinum charges 3.9 per cent on balance transfers for as long as it takes to clear what you owe.

If remortgaging still seems the best option, five-year fixed-rate deals have once again dropped below 5 per cent, so you should be able to get a good deal. Darlington building society is offering 4.94 per cent, fixed for five years, while Portman building society is charging 4.99 per cent.

If you want to fix for a shorter period, Portman has a two-year deal at 4.25 per cent, while the Cumberland building society offers 4.69 per cent for three years.

Loans out the window

Natasha Ewing, 29, a teacher, and her husband Daniel Brock, 32, an IT manager, recently remortgaged their two-bedroom house in Abbots Langley, Hertfordshire, because they wanted to consolidate their debts.

After increasing their mortgage by a further £15,000, they have been able to pay off loans they had taken out to buy a car and new windows for their home. They were even left with enough change to pay for a holiday.

"We could have saved up for the car and windows but we wanted them there and then, which is why we took out the loans to pay for them in the first place," says Ms Ewing. "However, it turned out to be very expensive as we were paying £300 a month for the car and £100 for the windows. We couldn't face forking out this much for the next four years."

Instead, the couple asked their mortgage lender about extending their home loan. A surveyor came round to assess whether it was in the lender's interest to do this and the new loan was approved.

"We paid off all our debts with the money and it only costs us an extra £90 a month on top of our original mortgage repayment," says Ms Ewing. "I realise we have to pay this for the next 20 years but an amount like that is neither here nor there."