Debt Consolidation Mortgage Advice
Debt Consolidation Mortgage
A Debt consolidation mortgage involves swapping all your individual debts for a single monthly payment. In the short term the payments are reduced but in the long term the overall amount payable will probably be higher.
Pros of a Debt Consolidation Mortgage
A debt consolidation mortgage agency will pay off all your smaller debts and reduce your monthly payment thereby making repayments more affordable and manageable. This in turn increases the likelihood of your credit score getting better over time.
Debt consolidation means paying back greater amount over a longer period and in many cases this would not be a good idea however it may be the only option if you cannot make all your separate payments and risk defaulting regularly.
Cons of a Debt Consolidation Mortgage
The full amount payable over the term of the loan is probably going to be higher than the total repayment costs of your existing debt. It is therefore essential that you calculate the costs of your existing debt and compare it to a potential consolidation loan. While the loans are cheaper month by month they are not cheaper overall.
The terms of the loan should also be taken into consideration. The loans are usually taken out over longer than normal periods of time which will inevitably put the total cost of the loan up. There may be very high early repayment costs which effectively mean that you are stuck with the full term of the loan. There may also be high costs for missed payments and even taking out such a loan may adversely affect your credit rating. For these reasons a debt consolidation loan should be thought of as a last resort, not an easy option.
Effect of a Debt Consolidation Mortgage
In the three years between 1999 and 2002 the amount of debt that was in consolidated debt programmes doubled from £20bn to £40bn. This shows a higher level of acceptance that these types of loans will alleviate peoples’ debt problems and go towards repairing their credit ratings.
Debt consolidation loans have been taken out by people already in difficulty and thus needed a quick solution to an existing problem. This has led to people taking the first product they are able to get and not shopping around for the best deal. In effect then many people are paying more than necessary for something that with some planning could have been cheaper or avoided altogether.
Things to Consider Before Getting a Debt Consolidation Mortgage
Most advertising for debt consolidation loans focuses on monthly repayments for a given loan amount and only briefly mentions in the small print the total amount repayable. All the figures need to be checked before considering taking out the loan. There are many things that need to be considered before taking out the loan:
- Interest rates and whether they are variable;
- Overall cost of the loan;
- Monthly payments throughout the loan;
- Are there any aspects of the loan that may mean that the payment values alter (either up or down);
- Early settlement conditions;
- Missed payment terms.
Dealing with Debt Consolidation
A debt consolidation mortgage is there to reduce your financial problems and payments so it is essential to keep up payments to avoid penalties. Do not allow other debt to reappear which could jeopardise your ability to pay the existing arrangement.
Home Equity Debt Consolidation Loan – The Basics
A cheaper option than the unsecured debt consolidation loan is one taken out as part of a mortgage or remortgage. This is secured against your home and because of this it will be cheaper.
Benefits
Using your home as security for a loan will mean that the interest rates are cheaper than those of an unsecured loan. If you add the amount you wish to borrow to your existing mortgage the interest rates are likely to be the same and this will be considerably better than an unsecured loan.
Mortgages are usually long term loans and as such will keep the monthly payments down to an affordable level but it is worth remembering that the total amount payable throughout the term will be higher than for the original loans.
Potential Problems with Home Equity Loans
Securing the loan against your property is in itself a considerable risk. If repayments are not made then there is the possibility of repossession.
The amount of money you can raise against your property is limited to the value of the property and the remaining amount on the mortgage. Most lenders will not allow the mortgage to be any greater than 80% – 90% of the value of the property. A simple example is that if the value is £100,000 and the loan to value rate is 80% then the largest amount you can have borrowed against the property is £80,000 in total. So if you existing mortgage has £50,000 remaining you can potentially borrow an additional £30,000.
Using the example above to illustrate another risk, if the property market drops and the house is now only worth £75,000 you will be in negative equity. Even if you sell the house the amount you raise will not pay off the debt if the mortgage value is high.
What Alternatives are there to Debt Consolidation Mortgage?
It is worth researching the alternatives to a debt consolidation mortgage before taking one out because it is a one-way process, once all your debts are consolidated there is no way to separate out individual payments. It might have been possible to come to an arrangement with a single creditor that would have been on better terms than a more expensive consolidation loan.
Dealing with the Debts through Negotiation
Your creditors may be willing to consider coming to a financial arrangement regarding your outstanding debts. The first thing to do is calculate exactly, and honestly, how much you have available each month that can be allocated to debt repayment. Once that is done you will need to look at each debt separately and work out the priorities for repayment. This should again be done accurately and the following figures should be calculated:
- the amount of the debt in total;
- the amount that you are currently paying, monthly;
- the interest rate that you are paying;
- how long there is remaining on the debt;
- any clauses or restrictions such as early repayment charges or default charges.
The debts that should be the highest priority are the ones with the highest interest rates and the ones that will cost you the most in the long term. Lower priority debts will be the ones with lower interest rates or early repayment charges.
When you have a list of your debts and their priorities write to your creditors outlining your accounts and proposing a new structure for payment of the debt. Creditors may prefer a reduced monthly repayment to a default but remember they are under no obligation to accept your terms.
If, after calculating your incomings and outgoings, you are unable to make any payments towards your debts then contact a debt counselling agency who will advise on your options.
Debt Consolidation Mortgage Resources
There are many resources available for both the consumer and the professional in debt consolidation, because of the nature of the business it is a highly regulated field and it is worth contacting an agency for independent advice.
Debt Consolidation Mortgage Advice
These agencies are free and should be able to assist with writing to creditors and dealing with a debt consolidation mortgage.
- Consumer Credit Counselling Service is a charity offering free and confidential advice to those in financial difficulties. They can advise on debt consolidation but also on the alternatives that may be available to you.
- The National Debt Line is a charity that offers advice on all aspects of debt from dealing with bankruptcy to agreeing payment plans with creditors. Free advice, twenty four hours a day.
- Payplan specialises in creating payment plans that are feasible and allow those in debt to make repayments in a way that is acceptable to all parties. Their services are free.
