What is debt consolidation?

Debt consolidation is when you combine all your debts into one new debt, often to save money.

You take out a new loan for the total amount that you owe, pay off your old loans with it and then just have one monthly payment.

How to consolidate debt

If you want to consolidate debt, your best bet is to speak to a financial adviser to make sure you’re doing the right thing.

You could end up paying even more for your debt, so speak to an expert first.

Is debt consolidation worth it?

Debt consolidation could be worth it if you’ll save money.

To be better off, you’d need to make sure that you’ll be paying less interest for your new loan than you do for your current loans combined.

Debt consolidation could also be worth it if you’d find having one debt with a single lender easier to manage than having several due at different times.

Debt consolidation mortgages

One way to consolidate debt is to add it to your mortgage.

You’d pay off your current debts and your mortgage would increase.You can only consolidate your debts if you're remortgaging.

Remortgage for debt consolidation

Remortgaging for debt consolidation is when you take out some equity from your home and use it to pay off your debts.

Equity is the amount your home is currently worth minus what you still owe on your mortgage.

The money you take from your equity is added to your mortgage. You’ll own a smaller proportion of your home and you’ll owe more on your mortgage.

It might be difficult or expensive to remortgage your home for debt consolidation if your equity is only about 20% of the value of your home.

How much you could borrow, how long for and the interest amount will depend on your personal situation.

Consolidating debts into a first-time mortgage

You cannot consolidate your debts into a first-time mortgage. You can only consolidate your debts if you're remortgaging.

Is it a good idea to consolidate debt into a mortgage?

It could be a good idea if you have credit card debt, or a personal loan, as these often have higher interest rates than mortgages.

When working out whether it’s cheaper to consolidate your debt into your mortgage, you must take into account:

  • the rate of interest charged

  • how long you borrow for

The downside to having more mortgage debt is that you’re generally only able to pay it off slowly over a number of years.

This means you could end up paying more in interest over the long term, even if the rate is lower than for other forms of debt.

You could use an online debt calculator to help you work out which option is cheaper for you. Then get some advice from a financial adviser.

Risks of consolidating debt into a mortgage

Paying more interest on your debt is just one of the risks you run.

The more you borrow, the more likely you are to end up in negative equity if house prices fall.

Negative equity is when the size of your loan is bigger than your home’s value.

If you’re in negative equity, it’ll be very hard to remortgage or switch to another product with your lender.

So you could end up being stuck with your current lender and have to pay their Standard Variable Rate – which is likely to be higher – when your initial mortgage rate period ends.

If you use your mortgage to consolidate your debts, which is known as a secured loan, you also risk losing your home if you do not keep up with the repayments.

Speak to a mortgage broker or a financial adviser to make sure you’re making the right decision.

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Your home could be repossessed if you don't keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

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