Are you still in a debt hangover from Christmas? Worrying about how you’ll pay your mortgage and other debts each month? Are your debts getting on top of you and you’re trying to find a solution? There is a way that a mortgage adviser can help you to consolidate those debts by adding them on to your mortgage and creating one single, manageable monthly mortgage payment.
Before we begin to understand how this mortgage solution can work in some circumstances, I must point out very clearly that this is NOT a way to ‘get rid of your debt’ or ‘a free way to reduce your debt’. This is not a debt management scheme as those should be avoided at all costs as they will very negatively affect your credit score for quite some time in the future. Consolidating your debt however, can be an effective way for some people to use their mortgage to make their debt much more manageable each month.
By remortgaging your existing mortgage, plus the total amount of debt you have, your total monthly payment will be lower each month, making it more affordable for you. If you and your mortgage adviser felt this was a sensible option for you, there are some important things to bear in mind here. You will still be paying back that original debt but over the same term as your mortgage (for 20, 25, 30 years for example) and it will then become ‘secured debt’. This means that if you do not pay, you could be repossessed (where the mortgage lender takes your home).
Some mortgage lenders are better than others when consolidating debt, this is where an expert mortgage broker will be able to support you as they will know which lenders would be best for you. For example, some lenders will disregard a balance on a credit card if you state that it will be paid off and it won’t affect your affordability. However, some lenders don’t treat credit card balances the same and will factor it in when assessing your affordability, which will determine how much they will lend you.
There are some debts that should NOT be included when consolidating:
- Credit cards with a balance less than £500. Simply because you would then effectively be paying off a small amount of money for the whole term of your mortgage (20, 25, 30 years).
- Loans with less than 6 months left. For the same reasons as a credit card with a small balance remaining. Also, by the time your mortgage application is complete and finalised with your mortgage adviser, the balance would be even less as this whole process can take a couple of months minimum.
- As an experienced mortgage broker, it is my opinion that you should avoid putting car finance or PCP payments on to your mortgage because a car is a depreciating asset. This simply means that, as your car decreases in value (which most do) your payment remains the same. If you add car finance to your mortgage and in 4 years’ time you wish to change your car to a newer model, you will still be paying for a car you no longer own for a considerable amount of time.
Debts that are suitable to consolidate with your mortgage:
- Large credit card balances where you are only paying the minimum payment. In this situation you will only be paying off the interest and not the actual money that you initially borrowed.
- More substantial loans that were used for home improvements for example. Your home is an appreciating asset unlike a car as discussed above.
Long term mortgage tip:
Once debt has been added on to your mortgage and the term has been increased, your new overall monthly payments should be less. You may even find, that because you have been used to paying most of what you earn on loans and credit cards, that you can actually afford a couple of hundred pounds more to pay off your mortgage quicker!
I cannot stress enough how carefully you should think before adding other debts to your mortgage because if payments are NOT kept up to date, it is not just your credit score that is at stake but your home. Your home might be repossessed if you do not keep up all repayments. It is not for everyone.
It is also incredibly important this strategy is not repeated in another 5 or 10 years’ time because if you are not careful, you will be increasing your mortgage faster than you are paying it off. You would need to make some serious changes to your spending patterns and behaviours to prevent getting into more unmanageable debt again. A good mortgage adviser can advise you about how best to stay within your financial means and budgeting carefully. See our comprehensive budget planner.
If it was decided together with your mortgage broker that debt consolidation would be a good option for you, there are two main ways you can do it.
- If your mortgage is due in 6-7 months’ time, then consolidating your debt can be done simultaneously. Your mortgage broker can take their time to understand your debts, the current term of your mortgage and the outstanding amount. With all of that information they will be able to carefully choose another lender and complete an entire remortgage.
- If your remortgage isn’t due for some time, (more than 6-7 months) re-mortgaging will usually result in a penalty. Usually a percentage of the outstanding balance. To avoid this, a second charge or a secured loan (as it can also be referred to) can be taken out in addition to your current mortgage to pay off any debt, and consolidate it to one monthly payment. A second charge like this will usually have a slightly higher rate than a mortgage but it most cases you would still be better off than having several unsecured debts. When your remortgage is due, together with your broker you can remortgage to pay off that second charge and have one more manageable mortgage payment.
I hope this has been helpful to you if you’re currently struggling with debts. I have helped many of my clients find a way out of debt using this strategy. With the right advice, I have managed to prevent them getting a bad credit rating, effecting their future finances for years to come but also and perhaps even more importantly, I have kept them in their homes which they worked so hard to get in the first place.