Should You Use Your Mortgage to Pay Off Other Debts?
Incorporating your other debts into your seemingly low mortgage payments may seem like a great idea. Naturally, it’s a tempting option in order to free up some spending money so you can pay for that holiday or new phone. However, while this can be a good move, you have to be sure that the long-term consequences do not outweigh the short term benefits, as using your mortgage to pay off other debts is a very risky form of debt management.
In this guide:
- Can you use your mortgage to pay off your debts?
- What are the benefits of using your mortgage to pay off your debts?
- What are the risks of using your mortgage to pay off your debts?
Can you use your mortgage to pay off your debts?
As with most financial issues, there is no simple, one-size-fits-all response. Whether or not you should use your mortgage for debt consolidation is entirely dependent on your personal circumstances. There are a number of aspects you should consider before taking this high-risk step.
Firstly, you must consider whether you have enough equity in your property to borrow more money against it. When you borrow money against your mortgage, you are essentially offering the value of your home as collateral. If your mortgage is close to or exceeds 80% of the value of your house, it will be very difficult, or at the very least, extremely costly to do so.
You must also inspect the terms and conditions of your mortgage deal. Additional borrowing may not even be permitted and, if it is, there will probably be fees involved. These admin costs will most probably be added to the loan, further heightening your debt.
If additional borrowing is not permitted, you may be looking to remortgage. This will also entail further costs, such as early repayment charges to get out of your current deal.
Perhaps the most crucial thing to determine is how much it would cost you. Consulting your mortgage lender is always a good idea, as they can help you work out the amount you can borrow and at what cost. This should help you make the final call as to whether it is worth (and whether you can afford) borrowing against your mortgage.
What are the benefits of using your mortgage to pay off your debts?
There is only one real benefit of this course of action but, granted, it is a big one - cheaper monthly payments. Since mortgages are typically paid off over a long period (decades, usually) your monthly payments are inevitably going to be a lot lower. This can be shown using simple division.
Even with interest, paying off £20,000 over 20 years is going to be much cheaper a month than paying it off within 4 years. As a result, you will have more disposable cash every month, so will no longer have to scrimp and save to ensure you are keeping up with higher payments.
What are the risks of using your mortgage to pay off your debts?
The results of this course of action are very much short term gain with long term pain.
Critically, you are putting your home at risk. If you fail to keep up with the payments, you may face repossession. This is the reason mortgage rates are much lower than loans - putting your house up as collateral gives the lender security. It is always better for you to have unsecured lending, as if you fail to pay it back, your home will not be on the firing line.
Despite the cheaper monthly payments, your overall costs are going to be a lot higher and the debt will last a lot longer. The amount of interest you are paying will go up and up, meaning that you will end up spending a lot more than if you had managed to pay larger sums every month for a much shorter amount of time. Remember that throughout the entire duration of repayment, you will have the additional stress of knowing your house is at risk.
So, ultimately, using your mortgage to pay off debts should only really be a last resort. If you can afford to make the repayment of any unsecured loans a priority you will save a lot of money in the long-term, even if you are paying more each month.