Having all of your debts and loans in one place might feel like it makes life easier. No more being chased by credit card companies or personal loan lenders, everything you owe is tied up in your mortgage, and you continue your repayments as before.
Consolidating your debts into your mortgage can bring down your monthly costs, but it will mean your home is at extra risk from the new secured debt, and you'll pay more in the long term.
But is this a good idea? As it turns out, consolidating other debts and loans into your mortgage can come with a heavy price tag in the form of putting your home at risk if anything goes wrong with your mortgage repayments further down the line.
This guide looks at the practicalities of consolidating your debts into your mortgage, what alternatives there are and what to do if you've decided to borrow more on your mortgage.
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If you've got lots of debt spread across different places, it can be hard to manage. Each credit card or loan charges different amounts of interest, so it's easy to lose track of how much your repayments for each are going to be.
Merging all of your debts into one single loan can make things easier. With consolidation, you borrow just enough money to pay off all of your existing debts. Then you owe money to just one lender rather than several.
The appeal here is that consolidation can make your monthly payments lower and easier to manage. But this also comes at the cost of you having to pay off the new loan for much longer, meaning it will cost you significantly more in the long run.
You can use your mortgage to consolidate your debts. Your mortgage is essentially one big loan after all. But this is a risky move. Let's look at what you need to consider.
By moving your debt from things like credit cards or personal loans into your mortgage, you end up securing that debt against your home when it wasn't before. If you miss mortgage repayments or slip into arrears, you're at risk of having your home repossessed.
Consolidating your debts into your mortgage means they follow you around for the term of the mortgage - usually 20 or 25 years at least. Not only can that be more psychologically taxing, but it's also a much longer time to have to worry about repayments for.
The appeal of using your mortgage to consolidate debts is the lower interest rate. After all, what looks better - an 18% interest rate on a credit card or 5% on a mortgage? But it's not quite as simple as that, as with a mortgage you pay the balance off over a much longer time.
This means you pay much more interest for the privilege of spreading out your repayments.
|Type of borrowing||Debt amount||Interest rate||Time until repayment||Amount of interest paid|
|Credit Card||£10,000||18%||5 years||£5,200|
|Mortgage||£10,000 added to £100,000||5%||25 years||£7,500|
Figures purely for example purposes and may not accurately reflect current market rates.
Once you’ve absorbed all of your other debts into your mortgage, it’s easy to feel like it’s all gone away. Out of sight, out of mind. But this isn’t the case. Continuing to clear credit card debt with your mortgage, for example, is a risky habit to get into as you are securing more and more debt against your home. If this kept happening over time, it could mean you have a mortgage that’s higher than the value of your home - otherwise known as negative equity.
To be on the safe side here and not fall into that trap, you could look at consolidating your debt into your mortgage as a one-time, last resort thing.
The answer to this is “it depends”. For some people, debt consolidation is their only option - for example, if they’re really struggling with large credit card repayments, owe a lot of money to lots of different places or have a poor credit history.
Consolidating your debts into your mortgage can make sense if:
If you’re struggling with paying your debts, it’s a good idea to speak to a debt advisor before borrowing more money. They might be able to help you negotiate a better repayment plan.
For everybody else, there are likely much cheaper and less risky ways to pay your debts. Make sure to check your credit score and carefully crunch the numbers to compare what you’ll owe before shifting your debts onto your mortgage. Some alternatives include:
If you’ve already taken the plunge and consolidated your debts into your mortgage, think carefully about whether you were made aware of the risks when you took this step.
If you were given bad advice about mortgage consolidation, it’s possible the mortgage was mis-sold to you. Mis-sold mortgages put you at risk of financial harm and should be complained about - you may even be owed compensation if you’ve been left out of pocket.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for mis-sold financial products and they can do the same for you.
Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.
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