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Consolidating your debt into your mortgage - advantages and disadvantages

Over the last ten years, the debt levels of households in the UK have grown significantly. Figures from Credit Action show that individuals owed nearly as much as the entire country produced during the whole of 2011. And, the average household debt in the UK (excluding mortgages) was £7,891 in May 2012.

If you have debt, you may have considered consolidating it into your mortgage. Thousands of people consolidate debt every year in order to reduce their outgoings and to simplify their finances. Here, we look at the advantages and disadvantages of consolidating your debt into your mortgage.

Debt consolidation mortgages

Debt consolidation is the main reason that people take out loans. An Office of Fair Trading report has stated that ‘debt consolidation appears to be the single most important reason given by consumers for obtaining a loan’ while a leading loan company revealed that debt consolidation was the most popular reason cited by borrowers for personal loan applications in 2011.

So, how do you consolidate debt into your mortgage? There are two main ways. Firstly, you can approach your existing lender for an additional loan secured on your home. This would be in addition to your main mortgage, and you could raise enough money to repay your various other debts. Instead of paying various loans, credit cards and store cards, you would instead make one payment to your mortgage lender.

Alternatively, you could remortgage your home. This involves switching your mortgage from one lender to another. As part of this process, you can borrow additional funds in order to repay your various debts. In order to take out a debt consolidation mortgage you will generally need to have some equity in your property.

Next, we look at the advantages of consolidating debt into your mortgage.

Advantages of consolidating debt into your mortgage

There are a number of advantages of consolidating debt into your mortgage.

Firstly, you will often find that the interest rate on your mortgage will be much lower than the interest rates on unsecured loans, overdrafts and credit cards. This is because the lender takes a legal charge over your property, providing them with security for the loan.

In addition, you will often find that your monthly repayment to the debt consolidation element of your mortgage will be significantly lower than the payments you were previously making to your other debts.

Finally, consolidating debt into your remortgage leaves you with one single monthly repayment. Instead of making multiple payments to various debts, you will end up with one creditor, one loan and one repayment. This can make your finances much easier to manage.

However, there are disadvantages to consolidating debt into your mortgage, as we see here.

Disadvantages of consolidating debt into your mortgage

When you take out an unsecured loan or credit card, you are not offering the lender anything as security. If you don’t make your payments the lender can take you to court but can’t seize any asset.

However, a mortgage or secured loan is secured on your home. This means that if you fail to keep up your repayments, you home may be at risk. While securing a previously unsecured debt may help you to reduce your payments, it also means that your home is then at risk if you don’t make your monthly payments.

Another disadvantage of consolidating debt into your mortgage is that you may end up paying more in the long term. While your mortgage may be at a lower interest rate than your secured debts, the chances are that you will pay your mortgage over a longer period. You may therefore end up paying much more toward your debts in total, especially if your mortgage is over a 20 or 25 year term.

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