by Mark Johnston
Whilst switching mortgages and adding other debts to it may help many peoples financial situation now in the long term it could turn out to be more expensive and problematic in the long term.
Adding credit card debt to a mortgage balance is not usually the best idea, although by doing this borrowers may have lower outgoings, they will be repaying this extra debt over many more years and also paying much more interest in the long run.
Increasing a current mortgage to repay credit cards and loans means effectively converting unsecured debt in to secure. By converting debts in to secure ones puts a much higher risk on home owners losing their homes if they are unable to pay for whatever reason.
A point to remember is the cost of borrowing is not just about the rate, it is also about how long you borrower for. The longer, the costlier and most mortgages are over much longer periods than loans or credit cards.
Another option worth considering before going down this route is speaking to the current mortgage provider as some may add debt to the existing mortgage and may even reduce the interest rate for a very small fee.
If re-mortgaging is the route to take work out the figures and make sure the total cost of entering a new mortgage is cheaper than the existing one. No mortgage should squeeze you dry, leave some leeway for things like rising interest rates, illness and job loss.
With the Bank of England base rates at 0.5% there are lots of re-mortgaging options to choose from. With this in mind borrowers should try to look past the latest fads and obtain something that allows them to pay off the debt quickly and cheaply.
Banks and building societies have tightened their lending criteria; most people will need considerable equity in their homes before even being considered for a re-mortgage application.
With the lending criteria being much stricter than in previous years and house prices falling it is worth finding out if there is room to add extra debt to a mortgage. The rule of thumb is that the lower the loan to value (LTV), the better mortgage deal borrowers are able to get. The loan to value (LTV) refers to the size of the borrowing compared to a homes current value.
Borrowers will now usually need a loan to value (LTV) of under 90%, if they try to add debts to a loan to value (LTV) ratio that is too high lenders will no doubt refuse it or make them pay for a new valuation. Even if a lender allows this it could increase the cost of a future mortgage, which defeats the gain, very few borrowers stay with lenders for the lifetime of their mortgage. Therefore the next time they want to switch deals it will be more costly.
Finally one of the golden rules to remember once you have re-mortgaged to clear debt is to close down all credit cards, loans and overdrafts that are being cleared to prevent their use again, creating more debt problem.
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