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The pros and cons of debt consolidation

Remortgaging to consolidate debt is a popular way of reducing credit card and loan repayments. But do the risks outweigh the gains?

It's a little bit like being attacked once a month by a school of piranhas. You start off with a nice, healthy-looking pay cheque. Then the bank takes a nibble, the credit card providers take a bite, those greedy store cards devour a huge chunk and, before you know it, most of your hard-earned salary has been gobbled up by your debt repayments.

You're making these payments left, right and centre, but by the time the piranhas have had their fill, you're barely even managing to stay afloat - never mind swim away unscathed.

The answer, some would say, would be to remortgage or take out a loan and consolidate your debts. This is a bit like taking all those heavy shopping bags you've been carrying, throwing away all the excess carrier bags and uniting everything into a huge, single backpack - a mortgage - which you can carry on your back more easily.

The only problem is, you're carrying your most valuable financial possession in that backpack: your home. Not a big deal? Think again. If you consolidate all those debts into your mortgage and then find that you can't manage the monthly repayments, you could be much worse off. Why? Because, unlike most personal loans and credit card debts, mortgages are secured loans - debts 'secured' against your property. That means your home could be repossessed if you fail to keep up the payments - a serious matter indeed.

"If you take unsecured debts and consolidate them into your mortgage repayments, you should pay a lower interest rate on your debt and your immediate outgoings are likely to be reduced - but you could be exchanging a short-term headache for a long-term migraine," warns Credit Action director Keith Tondeur.

"House prices could drop and any remaining equity in your house could rapidly disappear. You could lose your job or your relationship with your partner could break down. By remortgaging for a larger amount of debt, you're leaving yourself very little slack to cope with problems like these, and you're putting your property at risk."

Lower Rates

Tondeur urges anyone who wants to tackle their debt problems in this way to speak to a debt counselling service first to get advice on debt management plans.

But even he admits that, in some circumstances, remortgaging to consolidate debt is a good idea. After all, when the bank is biting, you have to provide those pounds of flesh somehow - and mortgage interest rates are usually lower than the interest rate on other types of debt.

Right now, mortgage lenders charge less than six per cent interest on some deals. Compare this to most credit card providers, who charge about fifteen per cent, and some store cards, which charge up to thirty per cent, and it is easy to see that consolidating your debt into your mortgage can cut down the amount of money you owe considerably.

For example, for every one per cent of interest saved per £10,000 of debt, you will save £100 a year. And many experts believe that the risk of secured debt has been reduced by rising house process and historically low interest rates.

Don't assume that remortgaging will be a good idea simply because the minimum payments are lower than those on your unsecured loans or credit cards. You might still find yourself unable to make those minimum payments. And if the debt you ran up on your credit cards is now part of your mortgage, it could ultimately cost you - and your family - your home.

Even if you can afford the minimum repayments, remember that mortgage payments are usually spread over a longer period of time than personal loans. The debt could end up costing thousands more as part of a mortgage because you have to pay interest on it for longer.

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