Whatever the reason may be that you need finance, if you have a mortgage particularly one that is low rate, it seems like a no-brainer to simply add on the debt of that new car or kitchen…but should moving debts to your mortgage really be your first port of call?
Of course, saving and budgeting for a major purchase is always your best option, and raising a debt on your mortgage more often than not isn’t the cheapest way to raise extra cash, so really it should be your last resort.
If you are thinking of moving debts to your mortgage to raise finances, what are the associated risks that you should be aware of?
Your Home Is At Risk
This is the big one, and the reason that mortgage rates are so much lower than other forms of lending is because your home is collateral, meaning the lender can take it back if you don’t keep up with your mortgage repayments. This is known as a secured debt, which sounds great until you realise that it is the lender who gets the security, not you.
It is always best to have unsecured loans, because at least if the worst happens and you struggle to pay, your home is safe. This is why I would always advise against borrowing extra on your mortgage to pay off credit cards or loans – you are changing unsecured debt into secured debt.
Don’t Confuse Interest Cost With Interest Rate
A mortgage in effect is just a loan, albeit one spread out over a much longer period of time than your average loan – typically 25 years, and the cost of any debt, including a mortgage, depends on the rate and how long you borrow the money for.
The longer you borrow the money for, the more it costs – even at a lower interest rate. Therefore it would be cheaper to take out a 5 year personal loan at 18% interest, than it would be to add the debt to your mortgage and spread it over 25 years at a much lower rate of interest.
If You’re Going To Do It, Only Do It Once
The reason that moving debts to your mortgage sounds so appealing is the psychological feeling that the debt has magically disappeared. Particularly as you’re no longer being chased by card or loan companies for their repayments. The danger then is that this way of clearing debts becomes a habit, and before you know it your mortgage is worth more than your house and you are in negative equity – a place you don’t want to be.
Doing something like this should always be considered a one-off thing; a last resort never to be repeated – and then cut those cards up!
So, It’s Cheaper To Find Alternative Finance Then?
As I said earlier, saving money without securing it against an asset as valuable as your house is always better, so what alternatives are there to shifting debt to your mortgage?
- Take out a personal loan – Currently, interest rates on personal loans are the lowest they’ve been, so if it’s finance you’re after rather than wanting to reduce your debts, an unsecured personal loan might be the way to go.
- Transfer the balance of your credit cards to a 0% option – If you have credit card debts and your credit history is fairly decent there are deals where you can transfer your debt to a new card at a cheaper rate. You can cut costs even further by getting the debt paid off within a short period of time.
- Move Existing Loans – It’s harder to cut costs when it comes to loans as there are normally penalties involved, however, if your loan rate is high and your credit rating is good it might still be possible.
Remember that your credit score is always going to affect whether or not you can get any type of finance – if it’s bad it’ll be much harder to secure a loan.
So, you’ve looked at these alternatives and still want to go ahead and borrow more on your mortgage. In that case, what are your options?
When your current mortgage lender lends you more money it is called a further advance and it’s a straightforward process as long as you are eligible. There will be a maximum loan to value (LTV) you will be able to borrow – normally 80% – 85% and your lender will also:
- Insist you have had your current mortgage for at least 6 months
- Want to know what you want the money for, and may even ask for proof
- Make you go through an application process, involving a credit check and potentially another valuation of your property
- Require the new loan to be borrowed on a separate mortgage rate, which will mean that arrangement or booking fees will need to be paid.
If after all that your lender agrees to give you a further advance, there are, of course, downsides. It could affect your ability to remortgage in the future should you want to, and another thing to consider is your credit history. Even if it was good enough to get you your mortgage in the first place, as lenders’ criteria change, it might not be good enough now. If for example you’ve taken a drop in salary or your outgoings have increased, it could scupper your chances!
This is when you pay off your existing mortgage by taking out a new mortgage on the same property with a different lender.
This is a very drastic step to take if your only reason is to borrow more money for something like a holiday or to pay off debts. But if you think this is the best bet for you, what will your lender do?…
- They’ll want to know what you want the money for and, again, they’ll probably want proof.
- Charge you mortgage fees such as arrangement and booking fees
- Not charge you for the valuation or legal work
This is great if you want to borrow a large amount and want to pay it back over a long period of time, but, if you are tied into a mortgage rate that would mean you have to pay an early repayment charge to leave it, you need to be sure it’s worth it. Also, a remortgage can take 6-8 weeks, so no good for those in a rush!
A Secured Loan
A secured loan, also known as a second-charge mortgage is a loan available to property owners where the lender can sell your house to get the money back if you can’t repay the loan. This type of secured loan isn’t secure for you – your home can be repossessed if you struggle to pay back what you owe.
So after all that what do you still need to ask “Is Moving Debts To Your Mortgage The Easy Saving It Seems?”
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