You may have seen adverts on your social media pages lately from companies advertising ways you can reduce your outgoings and save money each month by consolidating all your other debts into your mortgage. But what does this mean, and how does it work?
Well, simply put, consolidating your debts means you take out one loan and use it to repay all your other smaller loans, giving you a single, lower monthly repayment.
With house prices having risen a lot in the last few years, many people are finding that when they remortgage, they can afford to borrow more money from their mortgage lender and use this to repay the credit cards or loans they have outstanding. But is this the right solution for you, and will it save you money?
It’s important to understand the risks and costs. There are two main areas on this we want to highlight to you.
The first is the risk. A mortgage is a loan which is secured against your house, meaning that if you don’t keep up on the repayments, the bank or lender can potentially take your home back. If you borrow from someone on an “unsecured” basis and you don’t keep up on repayments you may face consequences such as local court action or a negative credit score, but it’s unlikely you will lose your home.
The second is the cost. Whilst consolidating debts from, let’s say a credit card that is charging you 18.9% per year, it may appear to be really appealing to reduce that rate to 1.8% for example. However, if you were planning on clearing that credit card in the next 12 months, adding the debt to your mortgage and repaying it over 25 years would ultimately be a lot more expensive.
Having made you aware of the risks though, there are some great advantages. Most people will save money by doing this. And this is purely down to the rate of interest charged. Let’s use a real-world example.
You have a credit card with a balance of £10,000 and you make the minimum monthly payments of £257 (1% of the balance plus 1 months interest). It will take you 4 years and 10 months to repay the credit card, and cost £4,843 in interest alone. So you’ll spend £10,000 but pay back almost £15,000.
Let’s look at adding that to your mortgage. If you owed £150,000 on your mortgage already, paying a rate of 1.80% and had 20 years remaining, the total amount you would repay would be £178,620.
If you borrowed an additional £10,000 and cleared your credit card, the total amount you would repay over the 20 years would be £190,528. Setting aside the £10,000 you used to clear the credit card, the additional interest paid on the mortgage, compared to the credit card will be £1,908. This is saving you almost £3,000 in interest, even though you’re paying the debt off over a longer time.
Additionally, if we use this example, you would be paying the mortgage at £744 per month, plus the credit card at £257 per month. Consolidating your debt would give you a single monthly payment of £793, saving you £208 per month.
And there you have it – this is how consolidating your other debts into your mortgage works. It could save you thousands.
We always recommend speaking to a qualified adviser before securing debts against your home as it may not always be suitable. And as always… here’s the legal bit…
Your home may be at risk if you do not keep up repayments on loans secured against it