Guide to debt consolidation

by Cheyne Wilcocks MSc, DipPFS, Cert CII(MP & ER) | 5th November 2019 | Insight

Consolidating all your debt into your mortgage can be viable proposition. However, there are things you need to be aware of and take into consideration before taking such action.

What you need to be aware of and take into consideration

When talking about debt to be consolidated into your mortgage the type of debt we are considering is unsecured debt, such as credit card debt, personal loans etc. You have to be aware that this is a different category of debt to a mortgage, which is secured debt.

This is an important consideration. If you fail to keep up your mortgage payments you are putting your home at risk of repossession as your home is the security your mortgage provider uses to underwrite it.

That is one of the reasons why you will pay a higher interest rate on your credit card debt and personal loan debt. The providers are accepting a higher risk of non-payment should you fall into arrears. With a mortgage the provider knows they can recover the outstanding mortgage through reposession and sale should you fall into arrears, so the risk of non-payment is lower hence a lower interest rate charged.

Another consideration and what you need to be aware of is the amount you will be repaying should you decide to consolidate your debt. Unsecured debt, such as credit card debt and personal loans are considered short term debt. A mortgage is considered long term debt. So the interest rate you will be charged on the mortgage may well be lower but because you are putting it over a much longer term you will pay far more in interest.

Why consider consolidating your debt

The main reason why you would consider consolidating your debt into your mortgage is to lower your monthly outgoings. As long as you understand you are re-categorising your debt and taking on a higher risk when it comes to your home lowering your monthly outgoings is a good reason.

When considering that you will be paying a lot more in interest because you are putting your debt over the longer term the majority of lenders do allow up to 10% of the outstanding capital to be repaid without any penalty per year. This includes within any mortgage deal term. So if you have any spare cash available at anytimein the future you can make over-payments to your mortgage with the view of clearing any consolidated debt earlier and saving those interest payments.

To conclude

Consolidating your debt can reduce your monthly outgoings, but at costs that aren't that obvious. As long as you understand these costs and their nature it can be a viable proposition. You need to be sure following any consolidation you will be able to keep mortgage repayments. Failure to do so will result in your home being repossessed and sold to recover the outstanding balance.

Something else to consider is how you manage your money moving forward. It is of little value to consolidate your debt now and find two years down the line you are back in a similar sitiuation. You may be just prolonging the inevitable and debt consolidation may not be the answer.

Talk to us and let's see whether debt consolidation is right for you. We will take your current situation and future goals into consideration and help you make the right decision.

Lawrie Mortgages will guide you through the mortgage selection process when considering debt consolidation.

You can start your enquiry by arranging a callback.

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