By now you’ve probably worked out that there are a few reasons why people can choose to remortgage. We’ve discussed remortgaging to get a better deal and remortgaging to release equity to enable you to make home improvements. The third and final reason that we will be discussing in this blog series is debt consolidation.
Remortgaging to consolidate debts is a decision that needs to be carefully considered as it is not always the best option available. You should first consider other options including (but not limited to):
1. Balance transfer credit cards
2. Shuffling money around different credit cards
What do I need to consider if I am thinking about shifting my debts to my mortgage?
· Shifting debts to your mortgage means that they will then be in a secured loan – if you can’t repay your home is collateral. It could be taken from you. This gives lenders security if you can’t repay but not you. If your debt is on credit cards and personal loans then this is unsecured. What this means for you is that if you cannot repay it is harder for them to take your home. Note that it is harder but not impossible.
· The interest rate. You might look at it and on the face of it having your debts on your mortgage with say a 5% interest rate looks like a no brainer compared to up to 33% on a credit card BUT you need to consider how many years this is across. In the long run you could end up paying back more interest on your debts if they are attached to your mortgage than if they are on credit cards and personal loans.
· Will your lender allow you to add debt to your mortgage? If your credit score is not as good as it could be or your salary has decreased since you took out your mortgage then they might not lend to you anymore due to tougher rules.
· What will it do to your loan to value? If adding debt to your mortgage pushes you above a certain threshold it might not be worth it.
None of this is to say that using a remortgage to consolidate debts is never worth it. It can be. As with everything, it just all depends on your personal circumstances! We would be happy to advise you on a suitable route and talk through all of the above things to consider with you without judgement.
Shifting debts to your mortgage is not something to get in the habit of doing. See it as a chance to change your spending habits if you can. There are lots of money advice websites that can help you better manage your money if you are struggling.
If you are consolidating your existing financial commitments, you should therefore be aware that whilst this may mean you will make short term savings, over the long term, you may end up paying more. This is because you may be extending the period of the loan. You are also transferring previously unsecured debts to a mortgage which is secured on your home and YOUR HOME MAY BE PEPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.