by Mark Johnston
Credit card debts can be soul destroying, the trouble is that balances can often just sit there without getting smaller even though the minimum repayment is being paid each month.
Moving debts on to a mortgage is psychologically easy, with doing this many feel that the debt problems have simply disappeared.
With the recession still biting and the property still struggling, homeowners considering re-mortgaging to clear other debts should think carefully before making a decision. This route may not even be a viable option as with falling property prices some may not now have enough equity in their homes to re-mortgage.
Shifting expensive credit cards and loans to a cheap mortgage does seem like a no brainer, yet there are huge pitfalls in this route that can leave many in negative equity or even worse cost them their homes.
Many borrowers see the price of their debts (the interest they are paying) versus the low rate on their mortgage payments and it makes sense to add them all together.
It is the interest cost, not the rate that counts, for example if someone borrows £10,000 at 5% over 25 years they would pay £7,500 interest, but at 18% over 5 years they would pay less interest, £5,200.
The main point to remember when considering re-mortgaging to add on other debts is that a mortgage is a secured debt, whilst credit cards etc are unsecured debts. So whilst secured debts sound better, it is the lender who gets the security. Therefore if you suddenly find yourself unable to pay your mortgage the lender can take your home. Although credit card and loan companies can be threatening and at times nasty, they can not take your home!
However if re-mortgaging can genuinely help you reduce debt and you will not be tempted to spend again it can be a good option.
Another option however would be to do a credit card shuffle, if borrowers have a decent credit history, balance transfer deals let them move existing debts to a new credit card at much cheaper rates for a small fee.
Re-mortgaging to add unsecured debt at the current time, with mortgage rates at historically low levels, may mean that some borrowers will even find themselves paying less per month than before if they shop around, but they must remember that the rates will eventually go up.
Borrowers should also try to keep the same mortgage term as before, for example not getting a new 25 year mortgage when they only have 15 years left on their old mortgage, just because the rate is cheaper. The aim is to pay off the same amount faster.
There is no definitive answer as to whether to re-mortgage to pay off debts but borrowers considering this route need to do their sums.
Re-mortgaging to pay off debts is a bit like getting your stomach stapled instead of dieting to lose weight, it seems like a quick fix but if you carry on spending as before, it will just worsen the problem later on.
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