It seems that these days, in a bid to manage finances efficiently more and more people are eager to try consolidating all their debts into one place by increasing the payments on their mortgage.
It’s seen by many as a way of controlling their money without having to make too many adjustments to their budgets, but is it as straightforward and financially savvy as it seems?
Putting your debts in one basket
The notion of people trying to consolidate their debts isn’t a new one at all. In fact, it’s been around for a very long time. Put simply it’s a way of taking a number of different debts you may have, for instance something like credit card payments, or loans and move them into one, smaller, simpler repayment scheme. In theory, it’s supposed to end up with paying a lesser figure each month which should take some of the pressure off weekly and monthly budgeting.
The jury is out on whether or not this is a good idea. For some people, it may work well, especially if there are a lot of outstanding debts say for instance, more than one credit card or loan. However, for most it can lead to a running up of new debts, as they try and pay off the consolidated debt and perhaps end up with other ones such as new credit card bills or other repayments.
Using a mortgage to consolidate debt?
It can be done, but it can also be a risky business. Before you think about doing something as drastic as this it can be worth your while to weigh up the considerations.
The pros of increasing a mortgage to consolidate debt
Firstly and perhaps most importantly is the fact that any monthly repayments made will be much lower. The reason for this is because a mortgage is more often than not paid back over a much longer time frame, so working on that basis the amount of money you would pay each month would be smaller. However, whilst this is a good thing in the short term, over the long term it can create it’s own problems.
The cons of increasing a mortgage to consolidate debt
It stands to reason that if you make the debt smaller, you will be liable to repay it over a much longer time frame, so although initially it can seem to make sense, you may end up saddled with years of repayments.
Your monthly payments may be lower, but taking into consideration the factors of monthly interest and the longer time frame to pay back, you could actually end up paying out a lot more money.
Most seriously of all is that you can end up putting your home at risk, especially if you end up being unable to make all the repayments or get into more financial trouble. The life of a mortgage is variable but can typically last up to around twenty years. If you can’t make the repayments or fall into greater debt, you could end up losing your house.
If that hasn’t put you off…
The cons far outweigh the pros, as you can see. However, if they still haven’t put you off it may then be worth considering these points:
Overall cost: Before you take the decision to go ahead and increase your mortgage it’s often very worthwhile contacting your mortgage provider to talk to them and see exactly how much money you can borrow and what the overall cost of lending money is. Based on the answers that the company give you, you can then decide whether or not to proceed with your plans to consolidate all your debts into one repayment. Many find that on looking at the figures that they are presented with at this stage that it does become untenable for them to undertake and will find another, better way of dealing with the problem.
Remortgaging: Some people may find that they need to remortgage their property to be able to do this and that when they begin investigating new deals, the costs involved with doing so prove much higher than they would have liked. As an example, removing yourself from one mortgage deal means that you may be liable for something called “early repayment charges”. Of course, they can be added to the new mortgage and paid off with the other debts, but it really is an added charge that most people could do without.
Equity in property: Many people these days have around an eighty percent or higher mortgage rate. This means that in the event they need to undertake something like debt consolidation that borrowing more money can prove very difficult or completely untenable. The money that you borrow against your mortgage is money that is actually borrowed against the value of your property, which can end up becoming more expensive.
Final points to think about
- If you’re thinking of consolidating your debts into your mortgage primarily to free up some spare cash to spend, then quite simply, don’t. You will actually end up paying more in the long term.
- If the problem lies solely with credit card debt then think about talking to whoever your provider is first before taking a risky step such as this. They may be able to help with a scheme of bringing the payments down into smaller, manageable chunks over a different time scale.
- Think about, in the short term, making a few overpayments on your unsecured debts, or at the very least try and bring some of the payments down before you resort to anything else. Again, in the short term this could prove financially challenging, but is a much safer way of getting rid of debts.
- If all this has failed, only look at increasing your mortgage as a last resort, but even then you may find your provider is unwilling for you to borrow more as the risks are so high.
About the Author: This article is written by Melissa Hathaway.