Combining Other Debt with Your Mortgage

If you have sufficient equity in your home you may be able to increase your mortgage and use the funds to repay other debt like credit cards or personal loans. There can be sound reasons for doing this but it can also be a bad idea.

Pros & Cons

You could save interest. This is most likely to be true for credit card debts since the interst charged can be very high (15%-20%). However, a common mistake is to add credit card debt to a mortgage then rack up the credit card again; this is sure way to end up in financial difficulty. Credit cards are great but only if you pay them off at the end of each month.

You might end up paying more interest. This tends to happen when adding personal loans to mortgages. The difference in rate is not huge but payments are reduced because the debt is usually repaid over a longer period; for example, a personal ,oan may rund for 5 years while a mortgage may run for 25 years. Using a mortgage to substitute a personal loan reduces monthly costs but you will probably pay more interest over the life of the loan.

When increasing your mortgage you are reducing the amount of equity in your property. The rate of interest charged on a mortgage is linked to equity; high equity = lower mortgage rate. If you add a loan to the mortgage then you may tip into the next LTV band and pay more interest on the whole mortgage. This could prove very expensive over time.

If house prices fall then you could end up in negative equity. This when the value of a mortgage is greater than the value of the property. Increasing your mortgage increases this risk. People in negative equity find it difficult to sell their home as the negative equity is not transferable to another property. If equity falls below 10% of the value of the property then it may prove very difficult to move house if you cannot increase your equity since a lot of lenders do not offer mortgages on properties with less than 10% equity, and those that do are much more expensive.

If you run into difficulty paying a personal loan or credit card then you might get a county court judgement but it is unlikely that you will lose your home unless your debts were so great that you were maed bankrupt. Adding debt to your mortgage will incraese your mortgage costs and if you have difficulty paying your mortgage then your home could be repossessed - you shoudl therefore think very carefully before adding other debt to your mortgage.