Debt consolidation is when a borrower takes out a new loan or remortgage to repay their other debts. This can be done for a number of reasons, such as to reduce your monthly payments, or to get a lower interest rate on the combined debt.
A very simple example would be if you had a £200,000 mortgage but also owed £10,000 on a credit card. The credit card interest is obviously much higher than the mortgage.
By remortgaging your home for £210,000 you can combine the credit card debt into your mortgage. It will have a much lower interest rate and your monthly payments will reduce.
The downside in this example is that the £10,000 of unsecured borrowing will now be spread over the mortgage term which could be 20-25 years. While the borrower is better off each month they have the debt for a much longer period of time and often the total interest paid will be more because of this.
Consolidating debts can be a very sensible course of action but you should always seek financial advice first. A remortgage mortgage broker or second charge mortgage broker could be helpful.
Debt consolidation can help you clear debts and re-organise your finances. However, it’s important to note that you could end up paying more interest overall with a debt consolidation mortgage, than if you had continued to manage your unsecured debts, as the mortgage will be spread over a longer term.
