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Debt consolidation mortgage: good move or big risk?

Debt consolidation mortgage: good move or big risk?
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A debt consolidation mortgage can really help you take control of your debts. But just like any loan, you need to consider the benefits and the drawbacks before you apply. Here’s a look at how these mortgages work so you can decide if the pros outweigh the cons.

What is a debt consolidation mortgage?

A debt consolidation mortgage is a type of loan. It’s based on equity, which is basically however much you’ve paid towards your mortgage already. In other words, it’s how much of your home you actually own.

Let’s say your home is worth £100,000 and you owe £20,000 on your mortgage. This means you’ve already paid £80,000 towards your home. In other words, you have £80,000 equity in the property. A debt consolidation mortgage lets you release some of this money to pay off your other debts.

A word of caution, though: this is a secured loan, meaning it’s held against your home. If you stop paying the loan, your lender could eventually repossess your property. Bear this in mind before you decide to proceed.

How does it work?

It’s pretty simple. Once you free up a lump sum, you can use the cash to pay off your other debts. So, you can pay down debts like:

  • Credit cards
  • Unsecured personal loans
  • Car finance

Let’s add to the above example. Say you’ve got a £3,000 credit card debt and you want to pay it off completely. Because you’ve already paid back £80,000 of your mortgage, you could take out a debt consolidation mortgage of £3,000. 

But what are the consequences? Well, you’re changing your original mortgage agreement. You need to pay back the money you’ve borrowed on your mortgage, so your monthly payments will probably increase slightly. The more you borrow, the higher the increase in your monthly mortgage payments. 

Before we get into the pros and cons of this, though, let’s quickly run over who can actually apply for one of these loans.  

Who can apply?

You might like the sound of a debt consolidation mortgage, but you still need to apply for one first. There’s no guarantee your lender will give you the loan. 

  • Anyone with a mortgage can apply. 
  • If you’ve recently applied for a mortgage holiday or payment break, you might not be eligible.
  • Your lender will compare how much you want to borrow against your current income. They do this to make sure you can afford the increase in monthly repayments.
  • If you have a low credit score, you might not get the loan. 

It’s a good idea to check your credit score before you apply. 

When is a debt consolidation mortgage a good idea?

There are many reasons why you might take out a debt consolidation mortgage, and there are a number of benefits.

  • A lump sum can help you get back on track after a temporary financial setback.
  • Since it’s a secured loan, the interest rate is probably lower than your unsecured debts. In other words, although your mortgage payments will increase a little, it could be cheaper to repay your debts in the long run.
  • By consolidating your debt into a monthly payment, it’s easier to manage your finances.

What are the drawbacks?

Debt consolidation mortgages are useful, but they’re not for everyone.

  • If you run up more debt before you repay your consolidation mortgage, you’ll end up paying more overall each month. That’s because you need to repay your new debts plus the mortgage at the same time.
  • By the time you factor in loan fees, you may end up repaying more overall. 
  • It may take you longer to clear your mortgage. 

And remember, it’s a secured debt. So if you can’t keep up the repayments, your home is at risk. If your other debts are unsecured, you should consider if the risk is worth it. 

Not sure if debt consolidation is right for you? Get financial advice, first.

Is there another way to reduce my debt?

Absolutely. Debt consolidation mortgages work for some people, but they’re not the only option. So, here are some other ways to shift your debt without getting a secured loan. 

  • Got credit card debt? Consider switching to a balance transfer credit card. You can move your old debts on to the new card and you won’t pay any extra interest for a certain period. In other words, you get longer to pay down your debt but it doesn’t cost you more money. 
  • Take out an unsecured consolidation loan. The rates may be a little higher, but you don’t run the risk of losing your home. 
  • Rather than trying to save money, why not focus on making more? Think about picking up a side hustle or start flipping items for a profit. Give your bank balance a little boost and take control of your debt again.

What next?

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