Consolidating debt into a mortgage

One of the big advantages of being a homeowner is the option to consolidate higher interest paying debt into your mortgage.

The basic advantage of consolidating debt into a mortgage is that you can move your debt to the lowest interest paying type of loan.

For example, if are paying interest on store cards or credit cards your interest rate may vary between 15% and 31%. At these levels of interest it can be very difficult to pay off your debts because so much goes on keeping up with the interest charges.

If you have a standard mortgage you will probably be paying between 5% and 6%. Therefore moving your debt to your mortgage has a clear advantage and will save considerably in the medium term.

How To Consolidate Debt into a Mortgage

To consolidate debt into a mortgage you will need to remortgage and get a bigger value for your initial mortgage. If your initial mortgage was for £140,000 and you remortgage for £150,000 you can use the extra £10,000 to pay off your other debts.

To be able to remortgage you will need to

1. Satisfy income criteria. Is your target mortgage 3 to 4 times higher than your income?
2. Have sufficient equity in your house. This means that if your house is worth £150,000 most lenders would be reluctant to lend £150,000 because this would mean your mortgage was 100% of the home’s value. Some may give a 100% mortgage, but, it would be more expensive as a result.

Drawbacks of Consolidating debt into A Mortgage

It can be easier to rack up debt, when you feel there is a relatively painless way of dealing with it. Don’t just consolidate your debt and forget about the underlying problem. - Also try to deal with why you have debt in the first place.

Falling House Prices. Unfortunately, with falling prices in both US and the UK, remortgaging has become less attractive as people fear the potential for negative equity. This means that your mortgage can be more than the value of your house. Also mortgage lenders are becoming stricter about lending criteria. However, although house prices are falling and are predicted to keep falling in 2008, the only upside is that interest rates are likely to fall as well. This will make mortgage debt relatively more attractive than other types of debt, which don’t seem to become cheaper when base rates go down.

Conclusion.

If you are paying debt at 8% or more, you should definitely look into consolidating this debt at the lowest possible interest. This could well be your mortgage. However, use the savings to try and make extra mortgage payments and reduce your debt. Don’t just use mortgage consolidation as a way to increase your debts.

See also:

Tips to Consolidate Debt