Debt Consolidation Mortgages

Debt consolidation mortgages are one of the main methods that debtors use to manage their financial affairs and involves swapping all your individual debts for one large debt and hence one monthly repayment.

By consolidating your debts, you will end up with one larger debt which can be repaid over a longer period of time and in most cases, at a rate which is lower than the rate(s) previously being paid on the individual debts. 

Once you have repaid your debts, it is tempting to take out more credit, which should be avoided if possible.

If you are considering a debt consolidation loan, it is vitally important that you calculate the exact costs of your current loans. Beware – many debt consolidation companies sell their product on the basis of the lower monthly payments; however, when you consider the extended duration of the new loan, you may find that the total costs are far in excess of what you would otherwise have paid. 

There are often extended and onerous terms attached to consolidated loans which make any early repayments financially unviable. In addition, large penalties can be imposed if you miss a payment and this should be borne in mind when considering this type of loan. 

Effects of Debt Consolidation

Debt consolidation is becoming an increasingly popular way for people to deal with escalating debts. In a debt-ridden society, being in debt is no longer viewed as an unsolvable problem or as such a barrier to future financing as it used to be.

Many people looking at debt consolidation as an option are already in financial distress and, therefore, in a hurry to enter into one of these complex agreements. This inevitably means that other options, which may be more appropriate in the circumstances, are overlooked.

Things to Consider

Here are some of the questions that a borrower should ask before entering into any debt consolidation loan:

• what interest rates are chargeable and whether the interest rate is variable;
• what the overall cost of the loan will be;
• what the monthly payments will be throughout the loan;
• whether there are any aspects of the loan that may mean that the payment values alter (either up or down);
• what happens if the loan is settled early or if any payments are missed

Dealing with Debt Consolidation

Once you have entered into a debt consolidation agreement it is important to make sure that these payments are always met in order to ensure that you do not suffer any large penalties. It is also vital that you do not further add to your debts. Remember, the purpose of debt consolidation is to reduce the number of debts that you have, so do not slip backwards, which would mean that the benefits of the consolidation would largely be lost.

Home Equity Debt Consolidation Loan

If you already own your own property, you may wish to consider a more specialist debt consolidation option commonly referred to as home equity debt consolidation loan. The theory of a home equity loan is that the debt is consolidated and secured against your property, either by means of a new mortgage or an extension to an existing mortgage.

Benefits

For those who have sufficient equity in their current property, this type of loan may be seen as highly beneficial. By using your property as security for the debt consolidation loan, it is likely that a better rate of interest can be obtained than with a traditional debt consolidation loan. If the debt consolidation is being added to the current mortgage, the rate is likely to be the same as for the current mortgage, which is almost invariably favourable when compared to any standalone, unsecured loan.

Mortgages can often be repaid over a long period of time, in some cases up to 30 years. This means that the actual monthly payments can be reduced considerably but the payments will continue for longer. In practice, this means that, by the end of the term, the total amount repaid may be much larger than if the individual smaller loans had been paid, when necessary. In some cases, however, when the monthly payments are simply unmanageable, spreading them over a longer period of time may offer the ideal solution.

Potential Problems with Home Equity Loans

Home equity debt consolidation is only cheaper because it is secured against a property. This in itself can pose considerable risks to a borrower. If the monthly payments are not made, there is a risk that the property may be repossessed by the lender in order to satisfy the loans.

In order to use a home equity debt consolidation loan, there has to be sufficient equity available in the property.

It is also worth bearing in mind that if the mortgage is for a large percentage of the property price and the housing market drops, you may find yourself in financial difficulties and unable to sell the property for the full value of the mortgage. If there is a shortfall, you will have to make up this shortfall, possibly with a further considerable loan. 

What Alternatives are there to Debt Consolidation

Anyone considering debt consolidation would be wise to look at the alternatives available to them before entering into any consolidation agreements. Once multiple debts have been consolidated, it is not possible to reverse the process and deal with the individual debts again. Bear this in mind, as some of the individual debts may have been at a favourable rate or offered the option of early repayment. These advantages would simply be lost following debt consolidation.

Dealing with the Debts through Negotiation

It may be possible to enter into negotiations with those to whom you owe money in order to create a payment plan that is sustainable for you and not overly onerous in terms of repayment. Start by working out exactly how much you can afford to pay towards ALL of your debts on a monthly basis. Be realistic when calculating this figure and make sure that you allow enough spare cash so that you do not find yourself in a position where you cannot make the payments that you agreed with your creditors.

Having worked out the total that you can allocate to clearing your debts, sit down and work out the following information for each of the debts:

• 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; and 
• any clauses or restrictions such as early repayment charges or default charges.

From this basic information you can work out which debts should be cleared first (i.e. the ones costing you the most money in the long-term) and the ones which should not be prioritised as the rates are lower or there are early repayment charges that would discourage any additional payments.

Write a letter to each of your creditors stating your income and expenses; indicate how much you can realistically pay off against each debt, on a monthly basis. Remember, a creditor is better off receiving small payments from you, on a regular basis, than a total default on your part. However, a creditor is under no obligation to accept this lower amount, but it is often a good way of opening negotiations.

If you are in a position whereby you have insufficient funds to deal with even minimal payments, contact a debt counselling agency (there are numerous free options available) which can advise upon the best options for you. If you have a mortgage, it may be worth requesting that you pay interest only, for a short period. This will enable you to redirect the capital repayment part to clearing other, more expensive debts such as credit cards or personal loans.

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Think carefully before securing your debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.