If you want to consolidate your debt, should adding them to your mortgage really be your first port of call?
Whatever the reason you need finance, if you have a mortgage – especially a low-rate one, it seems like a no-brainer to simply add on the debt from that credit card, new car or kitchen.
But is it your best option?
Obviously your best option is saving and budgeting for a major purchase – which is decidedly less sexy we admit – but it could be more sensible.
Raising a debt on your mortgage isn’t often the cheapest way to raise extra cash, so it really should be thought of as a last resort.
However, if you’re still thinking about consolidating your debts to your mortgage to raise finances, what are the risks that you should be aware of?
Your Home Is At Risk If You Consolidate Your Debts To Your Mortgage
As risks go, this is a BIG one.
Ever wondered why mortgage rates are so low compared to other forms of lending?
It’s because the home you’re going to buy with that mortgage becomes collateral.
This means that your lender can take it back if you don’t keep up with your repayments.
This is known as a secured debt – which sounds great until you realise that it’s the lender who gets the security, not you.
It’s 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 loans or credit card debts – it means changing unsecured debts into secured debts.
This article from experian explains in more detail the difference between secured and unsecured loans, and how they can affect your credit rating.
Click the link below to find out more
What Is The Difference Between Interest Cost And Interest Rate?
A mortgage is a loan like any other – it’s just spread over a much longer period of time, typically 25 years.
The cost of any debt, a mortgage included, depends on the interest rate and how long you borrow the money for.
You’ll be unsurprised to learn, no doubt, that the longer you borrow the money for, the more it costs – even at a lower interest rate.
This means it would be cheaper to take out a five year personal loan at 18% interest, than it would to add the debt to your mortgage and spread it over 25 years at a much lower rate.
If You Are Going To Consolidate Your Debts To Your Mortgage – Only Do It Once!
There’s a reason that consolidating your debts to your mortgage sounds so appealing, and that’s the psychological feeling that the debt has somehow disappeared…
Which of course it hasn’t.
All it means is that while you can enjoy the wonderful feeling of no longer being chased by credit card or loan companies, there is a danger that this way of dealing with your debts could become a habit…
…and before you know it your mortgage is worth more than your house and you are in negative equity.
Consolidating your debts to your mortgage really should be a last-resort-one-off-never-to-be-repeated-again thing – and then cut those freakin’ credit cards up!!
Is It Better To Find Alternative Finance Than To Consolidate Your Debts To Your Mortgage?
As I mentioned earlier, it’s always better if any debts you may have aren’t secured on an asset as valuable as your house!
So, what alternatives are there to shifting your debts to your mortgage?
- Take out a personal loan – interest rates on personal loans aren’t as high as you might think, so if you’re after finance rather than wanting to reduce debts, a personal loan could be the way to go.
- Balance Transfer Your Credit Cards – If you have credit cards, and your credit history isn’t shocking, there are normally balance transfer deals allowing you to shift debts to a new card at cheaper rates.
If you can repay them over a couple of years, it would be a massively cheaper option than adding it to your mortgage.
You can find out more about how to transfer the balance of your credit cards by clicking the link below:
Do remember though, that your credit score is always going to affect whether or not you can get any type of finance – and if it’s bad it’s going to be much harder to secure a loan.
If, after getting this far into the article, you still want to go ahead and borrow more on your mortgage; what are your options?
What Is A Further Advance?
When your current mortgage lender lends you more money, it’s called a ‘further advance’.
If you’re eligible for a further advance, you’ll be pleased to know that it’s a straightforward process.
There will be a maximum amount you’ll be able to borrow, called the ‘loan to value’ amount (LTV) – which is normally 80% – 85%
Your lender will also:
- Insist that you’ve had your current mortgage for at least 6 months.
- Want to know what you want the money for – and might even ask for proof.
- Make you go through an application process, which will involve 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 you jump through all of those (pretty low and easy) hoops, and your lender agrees to give you a further advance, there are, of course, some downsides.
It could affect your ability to remortgage in the future.
You also need to consider your credit score. Even if it was good enough to get you your mortgage in the first place, lenders’ criteria changes and so it might not be good enough now that you want a further advance.
“Why would it suddenly not be good enough?” you might ask..
Something as simple as taking a drop in salary, or your outgoings increasing, can scupper your chances when it comes to your mortgage lender lending you more.
What Is Remortgaging?
Remortgaging is when you pay off your existing mortgage by taking out a new mortgage with a different lender.
If the only reason you need more money is for something like a holiday, or to pay off debts, remortgaging is a pretty drastic step to take.
But, if you think that remortgaging is the best bet for you, what will your lender do?
1.They’ll want to know what you want the money for and, again, they’ll probably want proof
2.They’ll charge you mortgage fees such as arrangement or booking fees
3.They won’t charge you for the valuation or legal work
This is all great if you want to borrow a large amount and pay it back over a long period of time.
If you are tied into a mortgage rate it means you would have to pay an early repayment charge in order to get out of it, so you need to be sure it’s worth it.
It’s also worth knowing that a remortgage can take 6-8 weeks – so it’s not a good option if you’re in a rush!
What Is A Secured Loan?
As I mentioned earlier, a secured loan, sometimes called a ‘second charge mortgage’ is a loan available to homeowners.
Remember, despite that lovely, reassuring-sounding word: ‘secure’, a secured loan isn’t secure for you..
…If you can’t repay the loan, the lender can repossess your house and sell it to get their money back.
Think carefully before securing other debts against your home. Your home may be repossessed if you do nor keep up repayments on your mortgage.