Debt consolidation and mortgages

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A debt consolidation loan can make your finances much easier to manage – and could even lower the amount of money you’re required to spend each month. It does this by ‘consolidating’ your existing debts into just one.

There are other ways of consolidating your debts than taking out a new loan. If you’re a homeowner, for example, one of the ways you could consolidate your debts is by using your mortgage – assuming you have enough equity in your home, that is.

By combining your existing debts ‘into’ your mortgage, you’ll be able to reduce the number of individual debts you have to keep track of… and you may be able to save money on a short-term basis too.

Consolidating your debts with a mortgage

Consolidating your debts with your mortgage will involve increasing the size of your home loan, enabling you to repay your existing unsecured debts with the money you’ve ‘freed up’ from your house. You may find that this is easier to do when you’re already remortgaging – because if you choose to do this during an existing mortgage agreement, you may well be charged extra for it.

An example

To provide an example, let’s assume you’ve got a mortgage of £140,000 and unsecured debts totalling £15,000 that you’d like to consolidate. In this situation, you could take out a further £15,000 on your mortgage (by taking out a new mortgage for £155,000) and repay your unsecured debts. If there aren’t any other charges involved, you wouldn’t actually increase the amount of money you owe, but you’d be left with one debt (your mortgage) instead of several.

Let’s imagine that before you decided to consolidate your debts, it would have taken you five years to repay them (costing you £3,000 per year, plus interest). If you consolidated this debt into a typical 25-year mortgage, it means your payments would be spread out over a much longer period of time – which would lower the amount you’d need to pay (towards that portion of your debt) to just £600 a year, plus interest.

You would, however, be paying interest on it for longer, so it could well cost you more in interest in the long run (although the actual interest rate on a mortgage should be much lower than on most forms of unsecured debt).

This is just a simplified example, but it does show you the basics of how it works.

For more information on debt consolidation in the UK the following pages may be useful:

The question is, though, is debt consolidation with a mortgage a good idea?

Well, as you can see from the example given above, debt consolidation could help you save money and make repaying the money you owe much simpler – but it would only be suitable for you if you can manage your debts well enough as they stand.

If you’re really struggling with your finances now, it’s likely that debt consolidation won’t be right for you – it may just ‘delay’ the problem.

It’s also important to take into consideration the fact that adding debt to your mortgage will increase the overall amount you owe relative to your deposit, which will therefore reduce the percentage of equity you have in your home. This could have an impact on your ability to obtain ‘competitive’ mortgage deals in the future… unless you have a lot of equity.
What’s more, if you’re unable to keep up with payments towards your mortgage (before or after you’ve increased it), you’ll be putting your home at risk of repossession.

So, on that note, you should only consolidate your debts with your mortgage if you’re certain it’s the right option for you. Here is a video for you on bad credit mortgage refinance

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