Debt Consolidation

loan consolidationDebt consolidation is a popular term in the mortgage market and what it involves is taking out one large loan to pay of other smaller ones, in the mortgage business this normally means tapping into the equity of your home in order to do so. The equity of your home becomes the security for the loan, and this means that you may get a lower interest rate however there are also inherent drawbacks to this.

If you take out a loan in the form of a mortgage and it is secured against your home then in essence you are putting your home on the line, if you were mortgage free and bought a car for €80,000 putting your home as security for a loan in order to get the car then if you could not pay you could potentially have to foreclose on your home. Typically you would sell the car but this is just to give an example of the risk.

Sometimes debt consolidation makes perfect sense, for instance if you have several loans (especially if they are at high interest rates) then using the equity of your home to secure a loan at a cheaper rate can save you a lot of money in interest payments and the loan will typically be cleared off sooner as well. There are expenses that you will incur in order to obtain a mortgage (legal fees, valuations etc.) so count these in the over all costing, and as well as that you should try to ensure that the loans keep their original terms.

By ‘original loan term’ we are talking about the time it takes to repay the debt you are consolidating, if you wrap all loans into one then you are going to pay them all off over the same period, mortgages tend to be upwards of 20 years so paying off a car or credit card over this amount of time is ludicrous, it would be best to get a ‘split loan offer’ which would mean you take one portion over (for example) 5 years – this would include things like cars, hire purchase, short term unsecured loans etc. or (potentially) credit card bills for large purchases – and the remainder, the loan that is there for paying off the house would be over a longer more realistic term e.g. 20 years or 30 years etc.

Many people consolidate loans and don’t really do the figures on the difference it will make to their mortgage payments and the amount of interest paid, in fact, it was such a problem that the financial regulator now requires mortgage brokers to give a comparison to a client if they are consolidating debts. The most important thing, as with any major financial decision, is to get good advice from a source you trust, mortgage advice often comes from Mortgage Brokers but it can also be from a solicitor, accountant, tax advisor, or financial planner. The main thing is that you are happy with the advice and you accept the outcome of taking said advice. After all, its you that has to pay the loan!

debt consolidationAt Irish Mortgage Brokers we have qualified Mortgage Advisors (they hold the national Mortgage Diploma qualification), Qualified Financial Advisors (QFA) – another professional qualification, Certified Chartered Accountants, IAVI holders (thats an estate agent qualification), Solicitors, Car Finance advisors, Investment Intermediaries, and even a Quantity surveyor, so when you talk to us you are getting access to many professionals, and you are also getting access to all of the major lenders. Call us on 01 679 0990 during business hours if you’d like to have a chat.

On a final note: BE CAREFUL before choosing debt consolidation, if it is not done correctly and in a manner that helps then it can have long standing repercussions, if your payments are lower that’s not a bad thing but if short term debt gets placed over a long term loan you may end up paying three or four times more in the long run than you would have had to.

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