10:00am Monday 5th September 2011
IT FEELS like a no-brainer: shift expensive credit cards and loans on to a cheap mortgage and you’re quids in.
Yet while it seems a simple decision, there are mammoth hidden pitfalls that leave some in negative equity or, at worst, cost others their home.
Of course, some do gain greatly from using their mortgage to pay off debts, so if you’re thinking of moving your cash, here are the six key things you need to know before doing it:
1. Mortgages are SECURED debts, cards and loans unsecured.
While secured borrowing sounds better, it’s the lender, NOT you, who gets the security.
It means if you can’t repay, it can take your home. This means if you can’t repay, your home is at risk. So if everything else is equal, it’s better to stick with unsecured borrowing.
2. Many can slash borrowing costs without using their mortgage.
As it’s best to avoid extra secured lending if possible, the real question to ask yourself is ‘how does shifting debts to my mortgage, compare to just shifting them to cheaper credit card or loan deals?’ If the difference isn’t big, unsecured wins.
Compare your mortgage rate to the following: ● Balance transfer credit cards – if you’ve existing credit card debts and a decent credit history, balance-transfer deals let you shift existing debts to a new card at much cheaper rates for a small fee.Full help and current best buys at moneysaving expert.com/bts ● Do the credit card shuffle – even if you’re refused new credit, you may be able to use your existing debts more efficiently.
Call existing card providers to ask if you can shift debts from other cards to them. Though not as cheap, it can be easier to get and protects your credit score, though any current debts on that card stays the same cost.
● Shift existing loans – cutting the cost of loans is trickier, both as there are penalties and because loan interest rates have increased over recent years. If your loan rate is very high and your credit score has improved, it may be possible.
3. It’s the interest’s cost, not rate, that counts.
Which of the following costs less: borrowing £10,000 on an 18 per cent loan or £10,000 on a five per cent mortgage?
It seems obvious, but beware – the cost of borrowing isn’t just about the rate, it’s about how long you borrow for. The longer, the costlier – and most mortgages are usually over much longer periods than loan or credit cards.
For example, if you borrowed £10,000 at five per cent over 25 years, you’d pay £7,500 interest, but at 18 per cent over five years, you’d actually pay less, £5,200 interest. It pays to do the sums: see moneysaving expert.com/mortgagecalculator
4. Is there room to add debt to your mortgage?
The key mortgage metric is your LTV, loan to value ratio, which refers to the size of your borrowing compared to your home’s current value. The lower the LTV, the better mortgage deal you are usually able to get – and things have got much stricter in recent years.
You’ll usually now need an LTV of under 90 per cent (equivalent to a ten per cent deposit for a first time buyer) to even get a mortgage. Try to add debts and if your LTV is too high, lenders may refuse or make you pay for a new house valuation.
5. Shift debts to a mortgage, keep up current repayments.
For some it saves large amounts of money, but if you take the plunge, be wary, as that could seriously increase the long-term cost.
For example, if you moved a £10,000 typical card debt that was costing you £300 a month on to a £100,000 mortgage and didn’t increase the mortgage repayment (£585), you could add over £25,000 to the total interest repaid, because it would take so much longer to repay.
Yet go the other way and keep repaying the same total amount each month (£885) all on your mortgage and in some circumstances you nearly halve the total interest – saving £35,000.
6. Only ever do this once.
Shifting debts on to your mortgage is psychologically easy.
Many feel the problem debts have simply disappeared, as there’s no card or loan company chasing.
This therefore risks it becoming habitual pattern of clearing cards with the mortgage, then starting to spend on them again.
Do it too often and you could end up selling your house and ending up with nothing.
TV money guru Martin Lewis runs the consumer revenge website moneySavingExpert.com
Ensure you get his weekly e-mail so you’re constantly saving money.
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