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When you have multiple debts then it may be worth considering combining them into one…

Consolidating personal debt into your mortgage is a popular means of lowering the interest rate on your personal debt and combining several different outgoing payments into one…saving you time and money!

As with anything in life, we tend to appreciate things that are easier for us…

How do you debt consolidate?

This is done by refinancing your mortgage to another lender, and also requesting the new lender to pay out your personal debt in the process…

But is debt consolidation really saving you money?

The answer is NO

Well, not all the time anyway…it depends on how you manage your payments!

You see, personal debt has higher interest rates, so consolidating into a mortgage means you have a lower rate overall…right?

yes…BUT

The term of your personal debt is now much much longer. As interest is calculated daily, this means that your personal debt in the long run will cost you MORE in interest if you consolidate it!

This is the case for eg. personal loans or hire purchase loans, but not the case for credit cards as these are ongoing until the card is canceled…

Don’t believe me?

Let’s look at a personal loan balance of $25,000 at 12% over a 10 year term.

Total cost is $18,050 (if rates remain constant).

Let’s take the same loan balance of $25,000 at 7% (consolidated into your mortgage) over a 30 year term.

Total cost of that $25k personal loan is now $34,877 (rates constant)

So what can you do to make debt consolidation worth your while?

if we keep using the above example, what we can do is work out what the repayments would be over a 10 year term but using your interest rate on your mortgage…so in this case 7% and $290pm…

now subtract this from what the original payment would be if you hadn’t consolidated this debt, as above 12% over 10 yrs…$358pm.

The difference (approx $70pm) is what you need to keep paying extra into your mortgage to effectively have paid off the personal loan in the original time-frame but at a lower interest rate…

If you can do this, then debt consolidation is a good way to lower your payments…

With credit cards, consolidation has a greater benefit purely due to the much lower interest rate alone. As credit cards don’t have any ‘end term’ (such as 10 years for a personal loan), then the savings are much more significant!