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A debt consolidation mortgage (or re-mortgage) is the process of taking out a mortgage to pay off other debts. Interest rates on mortgages are typically much lower than credit cards, and the debt is paid off over a longer time period. This means that for someone with high debt spread over lots of loans or credit cards, taking out a mortgage or increasing your current mortgage to pay off the other debt can seem like a perfect solution. The amount you pay back each month is lower, and you won't feel like creditors are breathing down your neck.
If you’re being hassled by creditors, rolling up your debt into one place and agreeing to one management monthly payment can make your life much simpler.
You’re likely to pay lower rates of interest and lower monthly repayments. However - in the long term it can work out more expensive (see below).
You will only benefit from a debt consolidation mortgage if you address the problems that led to your debt in the first place. If they have built up simply from the cost of day to day living, you will need to review how you can bring down this spending to avoid being in the same situation in a few years. Each time you consolidate your debt it will become more and more expensive. Remortgaging your home changes an unsecured loan (credit card debt, for example) into a secured loan, which means you could lose your home if you can’t pay back your mortgage lender.
Overall, you may pay back more. Although the interest rates are lower, interest will be accrued over a much longer time period, which adds up over time.
Converting unsecured debt into secured debt puts your home at risk.
It’s a very serious position. And shouldn’t be seen as an easy solution. You should put together a financial plan that helps you live within your means without taking out more debt.
Instead of looking at mortgage-based solutions, your credit card and loan providers may allow you to reduce monthly payments or extend the period of your loans to help you pay back your debt. This route should be taken ahead of any mortgage decisions.
A further advance is when your mortgage lender agrees to lend you more money. It should be seen as almost taking out a new mortgage, except it’s with the same lender, and you aren’t paying off your existing mortgage. They will have a limit on how much you can borrow (no more than 80-85% of the loan-to-value rate of your home). They will also want to know what you intend to spend the advance on. You’ll go through another affordability assessment and credit check. You’ll might be offered a different interest rate for this advance, and need to pay arrangement fees on the agreement.
After all this, the lender could still refuse. If your financial position is weaker than when you first took out your mortgage, you could fail the affordability check even if you can afford what you’re paying now. If you’re looking to increase your mortgage in order to pay off credit cards or loans, you’re likely to have this in your credit file in the form of missed or late payments. This can make you a weaker candidate for a mortgage.
If you’re early on in your mortgage, and your loan-to-value is still quite high, it’s unlikely the lender will allow you to increase the debt.
With a remortgage, you repay your existing mortgage completely and take out a new mortgage for the amount remaining, plus the new amount you need to borrow. This means you will be subject to an early repayment charge on your current mortgage. The charge will depend on how much you have left to pay and how long you have left to pay it. In normal circumstances, even with this charge you may end up better off in the long run if you can find a much better deal elsewhere. However, with a debt consolidation mortgage, you’re likely asking to borrow a higher amount, and with a weaker credit report. You’re unlikely to have access to the best deals, and so this early repayment charge is just one part of a very costly situation.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATING EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.