Cost of Living Add Debt to Mortgage or Equity Release?
Published / Last Updated on 16/11/2022
We are seeing an increasing amount of people considering adding car or home improvement loans, covid-19 recovery loans, credit card debt and other debts to their mortgage or exploring equity release (if over age 55). This is because interest rates have increased and are likely to increase further meaning monthly loan repayments may be getting higher.
Much higher loan, car finance, mortgage and credit card debt costs combined with electricity and gas costs, food price increases is making things financial tight for many people.
- The cost of borrowing on a mortgage or equity release secured on a property is usually cheaper than interest rates on unsecured debt. When looking at your monthly payments or indeed via equity release with no payments, it may look very attractive to consolidate debt into mortgage or equity release may appear attractive at first glance. There is more to this than just than initial monthly cost saving
- If you move unsecured debt to secured mortgages on property, this puts your home a further risk if you then cannot afford higher mortgage payments in the coming years.
- Using a mortgage means you will likely pay more interest overall than if you had kept the loan as you would usually clear the loan in the next few years whereas if it is now on a mortgage, you may be paying interest on the additional debt for many more years to come. You should plan to overpay on your mortgage, once you have got through this difficult cost of living/higher interest rate period, so that the additional debt added to your mortgage will be cleared back to your normal mortgage level as soon as possible to avoid long term interest being accrued.
- If you move unsecured debt to secured equity release on property, this means your debt on a lifetime equity release mortgage will accrue additional interest and ‘roll up’ to an even higher debt for the rest of your life or until the day you move out of the property and sell up. You may wish to consider downsizing instead to release funds to pay off your debts.
- If you choose to remortgage to a new lender or take out an equity release scheme, you may incur financial adviser fees, legal fees, surveyor fees and mortgage application/arrangement fees.
- If your only option is to use a mortgage, you should talk to your existing mortgage lender first to ask if they will offer an additional/2nd mortgage loan, even if you could get a slightly cheaper mortgage rate elsewhere, as any marginal saving on interest rates by going elsewhere may be outweighed by any fees in getting a new mortgage.
You should only consider increasing your mortgage or using equity release to consolidate and pay off debts if you have exhausted all other options and this is your last resort.
