Is Debt Consolidation Advisable?

Many borrowers see debt consolidation as a win-win situation. They can reduce outlay and increase spendable income and if capital raising can put some cash in the bank. But is this a good idea?

 A professional mortgage advisers first approach should be that debt consolidation is not considered best advice unless they can prove it is in the borrowers interests, or that there are lifestyle choices now that demand the need for consolidation. These lifestyle choices should only be short-term, such as school fees or home improvements. And still an adviser must challenge the borrowers thinking and point out the disadvantages.

An adviser will look at a borrowers circumstances to try to understand the underlying cause for the debt accruing. If it is a fundamental budgeting issue, then consolidation may only paper over the cracks and not address the real issue. Failing to address the underlying cause will almost certainly mean further financial hardship in the future.

Here are some points a borrower should consider when looking at debt consolidation as an option…….

• Consolidating short-term debt into a longer-term debt secured via a mortgage on your property will almost certainly cost more in interest over the extended mortgage term. Whilst shorter term unsecured debt generally carries higher rates than secured mortgage rates, the extended mortgage term will mean a higher overall level of interest. It is fair to say this is not always the case, but your adviser should be able to work out if you are incurring higher levels of interest.
• Taking unsecured debts and securing them on your property leaves you exposed to losing your home if you fall into arrears. Keeping debts unsecured reduces these risks.
• It is generally accepted that consolidating debts with less than 2 years remaining is almost always not advised.
• Similarly consolidating interest free credit is always a bad idea.
• Consider why you want to consolidate? Some clients we see could easily reduce outlay by adopting other solutions such as reducing luxury and lifestyle outlay, shopping around for utilities and services, reducing and challenging bank charges.
• Habitual debt consolidation on an ongoing basis is most certainly not advised. Debt consolidation can be considered as a one off, but doing this multiple times will not address the underlying budget deficit issue. So eventually something will give. This could be missed payments, financial difficulty and in the worst case losing your home.
• Why am I consolidating my debt? Is this just habit, or convenience or is there a genuine need?
• Why have I accumulated debt? This will be because your expenditure has exceeded your income. But why is this the case?
• Is it advisable to fundamentally look at your budget. This will ensure you know what you spend, that you don’t spend unnecessarily and stop this financial situation coming up again in the future.
• Can you restructure finances to pay them off quicker at a lower interest rate rather than spreading payments over the term of your mortgage.
• Do not use capital raising on your mortgage to buy a car. You will have the debt for the term of your mortgage, but the car will long since have been disposed. And what will you do for the next car purchase?