Financial Freedom
A lot of my clients have multiple debts outstanding which are on high interest rates. A question they often ask is – can this be consolidated into their mortgage?
The short answer is, yes, however it will depend on the client’s circumstances. If they are struggling to meet a variety of monthly payments, then it is a good idea to have all of these consolidated into one, far more manageable, monthly commitment. It must be considered though, that the debt will then be spread across the term of the mortgage, which is ultimately a lot longer than the debt was spread over initially.
If your adviser is worth their salt, they will consider giving you the option of your mortgage being split into two terms (years) – the longer term that carries your mortgage balance, and a shorter term that carries the additional debt that you have added on. This means that the additional debt is not being spread over 20 years, it is only over 5 (for example).
Another option available to clients is using a secured loan. This will mean that the debt is secured against your property but is not a part of your mortgage. The issue with this can be that secured loan finance is often charged at a much higher interest rate than mortgage finance would be, but the process for obtaining a secured loan is often much faster and with much less assessment required to agree the loan.
Another thing to bear in mind are the fees that will be incurred. Secured loan finance tends to be charged as a percentage of the loan, meaning that a £30,000 loan can cost you around £3,000 to arrange. This fee is usually added to the loan and carries the same interest rate that the loan itself does. Mortgage advisers would tend to charge a set fee, which would likely be far less than this to arrange a much larger loan, but this will vary from firm to firm.
In order to be eligible for consolidating debts, you must have enough equity in your property to do so. This means that the loan you have on your property must be much less than the property’s value. So for example, if your house is worth £100,000 and your debt was £30,000, your mortgage can only be around £50,000 in order for this to be a viable option. Lenders can allow up to 90% for debt consolidation, but the majority cap this at 75% or 80%.
You can also consider approaching your current mortgage lender for a loan called a “further advance” – which means that you do not have to remortgage to another lender. The advantage to this is that you are likely to avoid set-up fees, however it will not be guaranteed that your current lender will offer the most competitive rate. This is when shopping around for a remortgage is a good idea and speaking to a broker is the best way to get impartial advice on this.
It must be noted that adding debt onto your home can put your home at risk. If you used a secured loan and stopped making the payments, they can ultimately take steps to have your property repossessed in order to reclaim their money. This will be a costly procedure and can put your ownership of the property in jeopardy. The same does, of course, apply to your mortgage – in the event that you stop making monthly payments, your home instantly becomes at risk.
I would also note that if an adviser offers you an alternative to remortgaging or a secured loan in the form of a Debt Solution (Debt Management Plan, Individual Voluntary Arrangement, declaring Bankruptcy etc) then please beware of the implications that this will have on your credit file. These should only be used as last resorts and it is important to ensure you have sought advice through the appropriate avenues. The link below is an example of a charity that is able to assist you with such queries:
All options must be carefully considered when consolidating debts as these clients should be treated as vulnerable customers. If you are considering moving existing debts into your mortgage, you should speak to a financial adviser and make sure they present you with options for consolidating the debts, and for leaving it as it is, so that it is clear to you what your options are and which one is the most cost-effective for you.
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