It is crucial to think carefully and make informed decisions about your debts in order to pay them back on time.
One option that you have is combining several debts into one.
I have compiled a comprehensive article on how a debt consolidation mortgage works to guide you further.
Let’s dive right in.
What is a Debt Consolidation Mortgage?
If you have several loans with upcoming repayments every month, it becomes extremely difficult to manage your finances – especially when it comes to repayments of credit card loans and other debts that require monthly payments.
A debt consolidation mortgage is a type of loan that pays off two or more than two of your loans. This way, you have only one debt to repay rather than several. This makes your repayments very easy.
However, it is important to think carefully and to do the math beforehand. Make sure you are taking a loan for debts consolidation with a lower interest rate than your original loan.
Such a simple move will save a good amount of cash for you in interest payments. This especially applies to credit card repayments. If you end up paying higher interest, there’s really no point in going through all that trouble taking a loan for debt consolidation.
You could also remortgage your debts and infuse them with your mortgage loan. This method of repayment is also authorised and regulated by the financial conduct authority. However, you’ll have to pay your mortgage for a longer period to compensate for the extra debt you take.
Also, if you’re not able to pay the entire loan in the end, your home may be repossessed. This is because home ownership is not transferred to you until you have completed all the payments of your mortgage loan.
Is it a Good Idea to Consolidate Debt into Mortgage?
Refinancing your existing mortgage into a consolidation debt reduces the number of payments for you. This means that you have to make a single payment of a bigger loan rather than small repayments of relatively smaller debts.
Doing this is a good idea if your current personal loan has a high-interest value on it. This will cause you to pay more in interest as compared to repayments of the principal amount.
Make sure to concoct a mortgage deal with a lower interest rate as compared to your previous personal loan. This will help you save money off your interest repayments if you successfully negotiate a lower rate on your debt.
Also, make sure that the agency through which you consolidate your debt into a mortgage is registered in England. Debt consolidation is also a complex process and you surely don’t want to get tangled up in its complications.
How to Consolidate Debts into Mortgage?
Consolidating your debt means that now you have a bigger home loan to worry about, and you must increase your monthly payments or the period of the debt. Failure to pay up your mortgage means that your home may be repossessed and you lose all ownership of it.
Debt consolidation also incurs some additional costs like legal fees, admin costs and a number of other arrangement fees. You may also be liable to pay an exit fee to remortgage your current mortgage deal.
Get a financial advisor to help you on the specific maths. Till then, you can make use of online free mortgage calculators too.
Factors to Consider While Consolidating Debt into Mortgage
The first factor to consider is obviously a competitive interest rate as compared to your previous debts. Mortgage deals usually have smaller interest payments as compared to other debts like credit cards, which accumulate a high-interest value every month.
Another factor that you must take into consideration is that the current value of your home must be considerably higher than the debt consolidation mortgage. You must give importance to these factors as they are rules of the Financial Conduct Authority.
Alternatives to Debt Consolidation Mortgage
One alternative is to refinance the debts of your credit cards. This will allow you to negotiate a lower interest payment on your new card and you probably won’t even be charged interest for the first few months.
You can pay off the loan before the zero-interest period runs out to avoid any additional interest costs on your debts.
You can also get a debt management plan. This means that a counsellor will deal with your creditors, not you. He might be able to convince them to lower interest rates, and might also get them to waive off late payment fees and any additional costs.
Another alternative is the settlement of your debts. In this way, you may be able to convince your creditors to take an amount lower than your total debt if you agree to pay the amount in a lump sum. This is a good option if you have a big amount of cash on hand.
Otherwise, you’ll have to take an additional loan to pay this lump sum amount which can be problematic in itself. And if you put this amount up against your home, you could risk losing your home to your creditors to pay off the additional loan.
The last resort that you should turn to when everything else fails is: Filing for bankruptcy. If you file for bankruptcy, depending on the type of bankruptcy, the court can take a number of steps to erase your debts.
If you file for section 7 bankruptcy, the court will sell all your assets (excluding your necessary assets for living such as your house, the furniture and your clothes) and use the amount as a payment of the loan to your creditor.
The creditor must accept this as payment and write off your loan.
The other type of bankruptcy is chapter 13 bankruptcy. If your income is higher than the income limit on section 7 bankruptcy, you file this type. With this type of bankruptcy, you can agree to a 3-5 year repayment plan which partially covers your debt.
However, the court and your creditors should agree that this amount that you’re paying is sufficient to erase your debts.
More information on filing for bankruptcy can be found at:
https://www.gov.uk/government/publications/guide-to-bankruptcy/guide-to-bankruptcy
Filing for bankruptcy should be your last resort as your credit score will take a major hit for the next 7-10 years and you won’t be able to take any additional loan.
How Does Debt Consolidation Mortgage Affect My Credit Score?
Taking a debt consolidating mortgage causes your long term credit scores to increase. Your score might take a hit at first and decline but in the long term, if you’re paying off this mortgage, your credit score will rise significantly.
However, you need to make sure that you don’t stack up any additional loans in this period and that this is the only loan you’re paying off at the time.
Frequently Asked Questions (FAQs)
Does consolidation mortgage hurt your credit score?
It might hurt your credit score at first, but as time progresses and you continue to make mortgage payments on time, your credit score will increase again provided that you didn’t take any additional loans in the meantime.
Is it smart to shift debt to a mortgage?
It is smart to shift high interest debts (credit cards) to a mortgage because usually on long term loans like mortgages, the interest payments aren’t so high. This makes it a cheaper alternative to pay off your debts.
Should I consolidate credit card debt into a mortgage?
You should consider taking this option as taking this option might lead you to save a lot of money off your interest payments. Usually, short term loans have a high interest cost attached to them which makes them harder to pay off.
When should I not consolidate debts into a mortgage?
Do not consolidate your debts if you aren’t sure that you can pay them off; because if you can’t, you’ll lose your home over it if you’ve taken the debt against your house.
Is debt consolidation generally a good idea?
Whether it is a good idea or not depends on your financial situation and the interest rates being offered to you on your new loan. It is no guarantee that you’ll be offered lower interest rates and obviously if the new interest rates are higher than the old ones, it is definitely a bad idea.
Consolidation provides short term relief but paying off long term loans and their interest payments can be a headache to deal with.
What credit score do I need in order to get a consolidation loan?
In the UK, the higher your credit score is, the easier it will be for lenders to give you money. Generally, all around the world, a credit score of 580 is considered good and lenders are likely to give you a consolidation loan if your credit score is higher than that.
How long before a consolidation loan gets approved?
Consolidation can take a certain time to get approved. This timeframe can range anywhere from 30 to 90 days. In very rare cases, it may take longer.
It takes so long because the process involves the processing and transmission of payoff statements, called Loan Verification Certificates (LVCs). LVCs can take time to be processed.
Final Thoughts
As scary as the words “Debt consolidation” and “Mortgage” sound, with a little understanding, they can actually be quite beneficial.
Consolidating your debt into a mortgage also involves some legal steps, so I suggest that you contact a professional as soon as possible and talk to them about the legal proceedings.
Or you can consult National Debtline for free debt advice.
As for whether it is a good idea or not, the financial aspect is explained extensively in this article.
If you need more additional help, please feel free to reach out to us on the email address provided. We’ll make sure that your questions are answered.
Good luck!