Using Record Low Mortgage Rates To Pay Off Debts – What You Really Need To Know By Samantha Borge
2020 threw financial challenges at the world and as usual, single parents felt the pinch harder than most. Many had to lean that little bit harder on credit cards when furlough hit, working hours reduced or worse, jobs disappeared altogether. For single parents who have managed to stay on the housing ladder personal debts like loans and credit cards can be consolidated into a mortgage to take advantage of record low mortgage rates. The usual result of consolidating like this is much lower monthly payments, but potentially higher costs over the long term. As a single parent myself, I know that for many freeing up cashflow month to month can be the deciding factor.
Borrowing money can be a very expensive business. The average credit card interest rate is around 20%*. So, for every £1000 the average person owes on a credit card they’ll be charged around £200 (annually).
Ironically, this is at the same time that mortgage interest rates are at an all-time low. I’ve personally seen mortgage rates as low as 1.04%. A mortgage on your house is a different way of borrowing money, but that is a HUGE difference in interest rates and the cost of borrowing.
So, what if you could transfer your credit card and personal loans on to your mortgage so that you pay the much lower mortgage interest rate rather than the credit card interest rate? Well, you can, but you need to fully understand the pros and cons of doing so and decide what’s right for you.
You need to qualify for increased borrowings
First off, there needs to be sufficient equity in your home and you need to meet the lenders affordability checks to increase the mortgage. If you owe, £100k on your mortgage and £10k on credit cards and/or loans, you would effectively be taking out a mortgage of £110k and using the additional £10k to clear your credit card debt, so the mortgage lender will, first off, vet you for the increased mortgage amount.
2. Security
Credit cards and personal loans are “unsecured” debt. If you miss payments the lender will pursue you, but they don’t have an automatic right to your assets. A mortgage is secured against your home and (you’ve heard this before!) your home may be repossessed if you do not keep up your mortgage repayments, so adding that £10k of credit card debt on to your mortgage swaps it from unsecured to a debt that is secured against your home, increasing the risk.
3. Long term cost
It is likely that consolidating personal debt into your mortgage will free up monthly cashflow as the interest rate charged will be so much lower. However, the life of a mortgage tends to be much longer than that of a credit card or loan so while you are paying a lower interest rate, you can end up paying the interest for much longer, possibly decades longer. So, while month to month you will have more spare cash, the overall long term cost could well be considerably higher. Here’s an example:
If you had £10k of debt on a credit with an APR of 20%, the monthly payments are likely to be in the region of £300. If you did no further spending on the card, it would take 4 years to clear the credit card and interest charges would mount up to over £4k. Consolidating that £10k debt into a mortgage and paying it off over 20 years, with an average interest rate of 5% (we have to assume that rates won’t always be as low as they are now) would cost around £66 a month, freeing up a massive £234 of cash into your pocket every month. However, while you would have more cashflow every month, that £10k would ultimately cost you over £6k in interest over the 20 year mortgage term.
Should you do it? Ultimately, consolidating debt into your mortgage will increase risk by securing the debt against your property. Depending on the specifics of your situation it will likely leave you with more cash in your pocket on a monthly basis but could potentially cost you significantly more in the long run. Debt consolidation into your mortgage has short term gains but should be considered carefully. If it is something you wish to look into, a good mortgage advisor will provide you with a clear comparison of the pros and cons specific to your situation.
If you would like to discuss your personal circumstances, contact your Mortgage Advisor. I can be reached on:
Get in touch with Samantha Borge, Mortgage Advisor, JW Homes FS Ltd 07799865907, sam@jwhomesfs.co.uk
Sources
*Comparethemarket.com
Mortgage disclaimer: Your home may be repossessed if you do not keep up repayments on your mortgage.