Why you need to calculate carefully
The appeal of debt consolidation is simple: swap expensive debt for cheaper debt and save money. But the reality is more nuanced. A debt consolidation mortgage reduces your monthly payments, often dramatically. However, it typically extends the repayment period from a few years to potentially decades. This means you could end up paying more in total interest even though the monthly amount is lower.
A proper calculation compares the total cost of your current debts over their remaining terms against the total cost of consolidating them into your mortgage. Only when you can see both figures side by side can you make a genuinely informed decision.
The figures you need to gather
Before you can run any meaningful calculation, you need to collect the following information about your current financial position.
Your existing debts
For each debt you want to consolidate, note down the outstanding balance, the interest rate (APR), the monthly payment, and the remaining term. Common debts to consolidate include credit cards, personal loans, car finance, store cards, overdrafts, and catalogue debt.
Your current mortgage details
You need your outstanding mortgage balance, current interest rate, remaining term, and any early repayment charges that would apply if you switched lender. Also note your current monthly mortgage payment.
Your property value
An up-to-date estimate of your property's market value. This determines your equity and the LTV ratio that a new mortgage would operate at, which in turn affects the rate you would be offered.
How to calculate the cost of keeping debts separate
For each debt, calculate the total amount you will repay over the remaining term. For credit cards being paid at the minimum rate, this can be surprisingly high. A £10,000 credit card balance at 22% APR with minimum payments can take over 20 years to clear and cost over £15,000 in interest.
For fixed-term debts like personal loans, the total cost is more straightforward: multiply the monthly payment by the number of months remaining and subtract the original balance to find the total interest.
Add up the total repayments across all debts to get your combined total cost of keeping debts separate. Also note the combined monthly payment across all debts, as this is the figure most borrowers focus on but is only half the story.
How to calculate the cost of consolidating
To calculate the cost of consolidation, you need to work out the new mortgage amount (current mortgage balance plus total debts to consolidate), the interest rate you are likely to get (based on your LTV, credit profile, and current market rates), and the term over which the new mortgage would run.
The monthly payment on the new mortgage can be calculated using a standard mortgage calculator. The total cost is the monthly payment multiplied by the number of months in the term, minus the original mortgage balance, giving you the total interest on the consolidated mortgage.
Do not forget to include one-off costs in your consolidation calculation: arrangement fees (typically £500 to £1,500), valuation fees (£0 to £500), legal fees (£500 to £1,500), and any early repayment charges on your current mortgage.
Worked example
Consider a homeowner with the following debts:
- Credit card 1: £8,000 at 24% APR, minimum payments of £200/month
- Credit card 2: £5,000 at 21% APR, minimum payments of £125/month
- Personal loan: £12,000 at 8% APR, £280/month, 4 years remaining
Total monthly debt payments: £605. Total debts: £25,000.
Current mortgage: £175,000 at 4.8% with 18 years remaining. Monthly payment: £1,290. Property value: £310,000.
Cost of keeping debts separate
The credit cards, if paid at the stated amounts consistently rather than minimum percentages, would be cleared in approximately four to five years. Total interest on credit card 1: approximately £4,500. Total interest on credit card 2: approximately £2,600. Total interest on personal loan: approximately £2,100. Combined total interest on existing debts: approximately £9,200.
Cost of consolidating
New mortgage: £200,000 at 5.2% over 18 years. Monthly payment: approximately £1,455. The additional monthly cost compared to the existing mortgage is £165. Compared to the current combined payments of £605 on debts plus £1,290 on the mortgage, the new single payment of £1,455 saves £440 per month.
However, the total interest on the additional £25,000 over 18 years at 5.2% is approximately £14,000. Add arrangement and legal fees of approximately £2,000, and the total cost of consolidation is roughly £16,000, compared to £9,200 for keeping the debts separate.
Making the result work in your favour
The calculation above shows that consolidation costs more in total despite saving money each month. However, there is a way to get the best of both worlds: consolidate to get the lower interest rate, but maintain overpayments equivalent to what you were paying on the debts. If you continue paying £1,895 per month (the original combined total) instead of the new minimum of £1,455, the additional £440 per month goes towards paying down the mortgage faster.
By overpaying, you can clear the consolidated debt portion much faster than the full mortgage term, dramatically reducing the total interest. Most mortgages allow overpayments of up to 10% per year without penalty. This strategy combines the lower rate of the mortgage with the shorter effective repayment period of maintaining higher payments.
What online calculators miss
Most online debt consolidation calculators provide a simplified view. They often miss early repayment charges on your current mortgage, arrangement and legal fees, the impact of your specific LTV on the rate offered, the fact that credit card minimum payments decrease as the balance reduces (meaning the debt takes even longer to clear), and the potential to overpay to reduce total interest.
A specialist broker will run a comprehensive calculation that accounts for all these factors and provides a genuinely accurate comparison.
When the numbers clearly support consolidation
Consolidation is most clearly beneficial when the interest rate differential is large (credit cards at 20%+ versus mortgage at 5%), you commit to overpaying to avoid extending the effective repayment period, ERCs on your existing mortgage are low or zero, and arrangement costs are modest relative to the debt being consolidated.
When the numbers do not support consolidation
Consolidation is less attractive when the debts are relatively small, you are close to paying them off at current rates, ERCs on your existing mortgage are substantial, or you are unlikely to make overpayments to offset the longer term.
Get a professional calculation
A debt consolidation broker will run the numbers for your specific situation, comparing every available option including remortgage, second charge, and keeping debts separate. Nesto matches you with an FCA-regulated broker for 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.