Debt consolidation with an interest-only mortgage (case study)

Client’s situation

The clients were in their mid-40s, had no children, and were in well-paid employment with a joint income of around £80,000.

They owned a property valued at £400,000 and had an interest-only mortgage balance of £210,000. The interest-only arrangement was due to end in seven years, and their intended repayment method was the sale of the property.

Alongside the mortgage, they had unsecured borrowing totalling roughly £30,000, made up of personal loans and credit card debt.

Although their existing payments were up to date, the structure of their debts created pressure:

• The mortgage payments were interest-only, so no capital was being repaid.
• Credit card and personal loan payments were largely covering interest and minimum repayments, with limited progress reducing the balances.

The clients wanted to consolidate their unsecured debts and also change the mortgage to a repayment basis (capital and interest), but their previous lender would not allow the consolidation and switch.

The problem

From the outside, the clients’ circumstances looked straightforward: stable income, a good payment history, and a property with significant value.

However, lenders assess debt consolidation through affordability and the nature of the unsecured borrowing. In this case, the unsecured debt had built up over time, and the lender’s view was that it was not suitable for consolidation on the terms the clients needed.

This produced a difficult “catch-22”:

• Affordability calculations worked against them: the lender treated the existing unsecured repayments as outgoings, which reduced the amount the clients could borrow.
• Unsecured options had a time limit: new unsecured loans are typically repayable over shorter terms (often up to around seven years), which would have pushed the repayment profile beyond what the clients could comfortably manage.
• Alternative secured routes could leave the mortgage unchanged: some options could repay the unsecured debt using a second charge, but still leave the main mortgage on an interest-only basis—meaning the original end-of-term repayment concern would remain.

The solution

After reviewing the market, our brokers identified a lender willing to consider the application with a more detailed approach to underwriting.

The outcome was a remortgage that:

• consolidated the unsecured debts
• switched the mortgage to a repayment (capital & interest) basis
• set the new mortgage at £240,000 over a 20-year term

The lender also offered practical support during the process, including a standard valuation and legal services, and the arrangement fee was added to the mortgage at the clients’ request.

What changed for the clients

The clients were able to simplify their finances by bringing their unsecured debt and mortgage into a single mortgage arrangement.

With the mortgage now on a repayment basis, they no longer needed to rely on selling the property to address the end of the interest-only term.

Just as importantly, the new repayment plan was aligned to the clients’ stated monthly budget, reducing the need to manage multiple debt payments across different products.

Key considerations and risks

This type of strategy can be effective, but it is important to understand the trade-offs.

In this case, the clients were made aware that moving short-term unsecured borrowing into long-term secured borrowing can increase the overall cost of credit over time.

They were also advised that consolidating unsecured debt into a mortgage can increase the potential risk to the property if mortgage payments are not maintained over the term.

Conclusion

This case demonstrates how a remortgage can be used to address two connected issues:

• consolidating unsecured debt that may not be accepted for straightforward consolidation
• moving from an interest-only mortgage structure to repayment terms that better match the clients’ longer-term plan

By securing a repayment mortgage on a suitable term and keeping repayments within budget, the clients reduced the need to manage multiple debts and removed the pressure of an impending interest-only end date.