Debt Consolidation Mortgage - Will it be Your Friend or Foe?

Only a few years ago, the prospect of a debt consolidation mortgage was often hailed as the way forward. And it’s clear to see why. Homeowners were getting in to increasing unsecured debt – in 2007, all debt in the UK (around £135tr) exceeded GDP for the first time (around £133tr) – while interest rates were temptingly low. In October 2003 for example, the base rate stood at just 3.5 per cent. As a result, many homeowners were persuaded to borrow more of this cheap money against their homes – which of course were rocketing in value – and pay off more expensive unsecured debt like credit cards. This became known as a debt consolidation mortgage.

How does a debt consolidation mortgage work?
But, really a debt consolidation mortgage is just another name for a remortgage or a further advance. The reference to ‘debt consolidation’ is simply what the homeowner does with the money released. A remortgage means when you switch lenders and increase your borrowing in the process, whereas a further advance means sticking with the same lender and deal but borrowing more against your property. Either of these types of further borrowing is widely referred to as a debt consolidation mortgage.

What are the pros of a debt consolidation mortgage?
A debt consolidation mortgage is very useful in terms of the fact it keeps all of your borrowing in one place. This means there are fewer Direct Debits to organise or fewer repayments to miss as, clearly, you have fewer creditors. Another bonus of a debt consolidation mortgage is that, while mortgages rates are not as low as they once were, they are still a lot cheaper than the rates payable on credit cards, store cards, overdrafts and personal loans. This means that your debt consolidation mortgage will leave you safe in the knowledge you will not be paying eye-watering rates of up to 30 per cent APR on any borrowing.

What are the cons of a debt consolidation mortgage?
However, equally there are some downsides to a debt consolidation mortgage. The first one is that the one new loan you have secured against your home, is payable over a longer period than the five-year term of a personal loan for example, meaning that what you save in the rate of interest, you may pay anyway in the length of time the debt consolidation mortgage runs for.

The other downside to a debt consolidation mortgage is that, when you are upping the loan secured against your home, it relies on the fact that house prices are going to go up, as they have done over the last 10 years by 197 per cent, according to Halifax figures. But these days are over. Both house price indices from Halifax and Nationwide building society are predicting that house prices will stall at 0 per cent by this time next year (January 2009). So you could find your debt consolidation mortgage has upped your mortgage to a greater chunk of your home’s value than you originally thought.

A debt consolidation mortgage is worse news still if house prices fall as it could put you in negative equity faster than the natural decline of house prices would have done. Being in negative equity will often prevent you from moving home as your mortgage – alongside your debt consolidation mortgage – is now larger than the value of the house.

Seeking help from an experienced broker like TMBL is therefore always a good place to start before taking on the serious borrowing that is a debt consolidation mortgage.