How you should consolidate your existing debts into a mortgage - March 24, 2020

“Debt certainly isn’t always a bad thing. A mortgage can help you afford a home. Student loans can be a necessity in getting a good job. Both are investments worth making, and both come with fairly low-interest rates”Jean Chatzky

If you are having financial issues due to credit card debts or other conventional loans such as a personal loan, you can think about getting out of debt.

You may choose to consolidate your debt burden by remortgaging your existing home or by taking out a new home loan.

This is a considerable option to reduce interest on debts, as the interest rates offered on the mortgage might be lower than your existing credit card debts or other loans.

Remortgaging will allow you to consolidate all of your debts into one loan that is easier and cheaper to manage. However, there are some criteria that you need to fulfill.

So, let us dig deeper and get more information about such loans.

What is a debt consolidation mortgage?

A debt consolidation mortgage denotes the single conventional loan, taken by using the available equity in your home to help pay off unsecured debts such as credit card bills, hire purchase agreements, personal loans, etc.

By re-engaging some of the equity that you have already owned on your home, you may reduce the amount of debt you owe, help your monthly budget and get financial freedom.

A debt consolidation mortgage is helpful to reduce the total monthly payments that you have to pay each month. This way you may free-up a good amount of cash to pay off your debts or to provide you with a more comfortable living environment.

This loan is also called as debt consolidation remortgage, as a mortgage and remortgage are referring to the same product.

Why should you consolidate debts into a mortgage?

Taking out a debt consolidation mortgage or a Remortgage loan for debt consolidation may prove cheaper for you and you may manage your finances easily.

Unsecured debts such as credit cards, payday loans, have higher rates of interest compared to secured loans such as mortgages. It is because there is no collateral needed for the creditor to get a credit card. If you become unable to pay your unsecured debts, there’s no security by which the credit card company may get back its payment.

But a mortgage comes with your property as collateral. Because of this, you may grab a better rate of interest than if you took out an unsecured loan to pay off the other outstanding debts.

With a debt consolidation mortgage, you may consolidate and pay off the following unsecured debts:

  • Credit cards
  • Personal loans
  • Payday loans
  • Overdrafts

For example, if you had £6,000 on one credit card with an interest rate of 25.5%, a personal loan of £12,000 at 12.5% APR, and another loan of £6,500 at 15.95% APR, your total debts will be £24,500. With this current interest rate, after 10 years the amount paid may reach nearly double the debt amount.

However, with a 10-year debt consolidation mortgage with an interest rate of even 5% (now significantly lower with recent measures taken by the Bank of England), you may pay back much lower instead.

Before you take out a debt consolidation mortgage, you must consult with a mortgage expert or a mortgage broker who can help you to decide. The expert may review your circumstances and suggest to you the best way to consolidate high-interest credit card debts or other high-interest loans.

Things to consider before consolidating debts with mortgage

Before you apply for a mortgage to consolidate your debts, it is wise to think about whether or not it is possible for you. Here are some things you need to consider:

a) Do you have enough equity to borrow more money?
You must understand the fact that whenever you borrow money against your mortgage, you are losing your owned home equity on that property. If your owned home equity is around 20% or the mortgage is already around or above 80% of the value of your home, it will be very difficult to borrow more money. You must own a good portion of home equity, Once you have consolidated and paid off all of your debts by using the mortgage, a major or the entire of the equity will be owned by the lender.

b) Does your mortgage deal involve any costs?
You should read all the fine prints of your mortgage agreement and check the terms and conditions of your mortgage carefully.

You must ensure that you are allowed for additional borrowing. You should check for fees or administrative costs that should be added to the loan. Such additional costs may make your debt much higher.

c) Are you taking out a new loan or remortgage the existing?
A new mortgage deal may involve less cost than a remortgage. There are fees and additional charges involved in remortgage such as – exit fees, arrangement fees, legal and valuation costs, etc.

But remortgage can lower your interest rates if you choose the same lender. A perfect remortgage arrangement may have a positive effect on your finances, both in the short and long term.

If you are serious about considering this option, you should contact your mortgage lender asap to get information on how much you can borrow. After getting the information you may decide if it is wise to consolidate other debts into a mortgage.

Is it a wise decision?

Practically, like other financial decisions, you might face up and downs on this decision too. But everything mostly depends on your financial situation. You might have to balance the potential benefits with the risks to get the best out of this option.

With the potential benefits discussed above, you may have to consider several disadvantages of consolidation debts into a mortgage. You must do plenty of research before remortgaging your existing home.

Several disadvantages of remortgaging existing debts may include:

  • The lender may increase your amount of monthly repayment as per new terms.
  • The lender may increase your repayment tenure. As a result, you may payback for a longer period, which is more in total than you originally owe.
  • Several fees can be associated with the application process if you switch lenders.
  • Consolidating your unsecured debts with secured debt (mortgage) will convert all your unsecured debts into secured debt, but your debt amount would be the same. However, your home would be considered as collateral and if you can’t pay back the loan, you will lose your house.

“Our primary objective in every mortgage transaction should be to borrow in a way that reduces debt, improves financial stability, and helps us get debt free in as short a time as possible!”Dale Vermillion, Navigating the Mortgage Maze: The Simple Truth About Financing Your Home

Author: Patricia Sanders