Debt Consolidation: What Are the Benefits?

Debt Consolidation, Money Management, Reduce monthly expenses

This article is contributed by Genistar’s mortgage partner, SmartR Finance. 

If you owe money on loans, credit cards and other types of personal debt, you may be paying thousands more than is necessary in monthly repayments and interest charges.  

The cost-of-living crisis has put financial pressure on many households, which has led to reliance on unsecured credit to stay on top of monthly living expenses. Overdrafts and credit cards, which most people intended to use only temporarily, have become an essential part of keeping on top of day-to-day expenditures. The monthly payments towards these debts can quickly mount up and eat away your disposable income. 

The idea of debt consolidation, i.e., putting debts together with one creditor to pay off multiple debts to reduce costs, is not a new one. But it is an important consideration given the many pressures on household finances. For homeowners there can be several advantages in consolidating debt: 

1. Reduce Your Monthly Payments 

Consolidating multiple debts onto a longer-term debt can bring down monthly costs dramatically. An example of this is as follows: 

  • A borrower has £44,000 of credit card debt, with an average interest rate of 27% across five cards. This is costing them £1,320 per month which is mainly interest with very little going towards reducing the debt 
  • If they consolidate their credit card debt into a debt consolidation mortgage, it will only cost £253 per month extra on top of their mortgage (assuming a repayment mortgage over 25 years at a rate of 4.8%). The 4.8% mortgage rate would be much lower than the 27% they were paying on their credit cards. 
  • The monthly saving is £1,067. This extra disposable income could be used to build up savings or used as a regular overpayment on the mortgage to pay it off more quickly than the 25-year term. 
What is the advantage of debt consolidation

2. Become Debt Free Faster 

In the example above there is an option to use the monthly savings from consolidating debt as regular contributions to the mortgage to pay it off more quickly.  

Consolidating the credit card debt freed up £1,067 per month. If only half of that was used to overpay a £170,000 mortgage every month, the results are truly amazing: 

  • The mortgage would be paid off 12 years and 5 months early. 
  • By overpaying on the mortgage, they would save £65,780 in interest. 
Is it good for your credit to consolidate debt

3. Simplify Your Finances 

A simple benefit of a debt consolidation remortgage that does not involve complex calculations is that it makes managing your debts easier. Instead of juggling multiple repayments at different times of the month, you’ll have only one monthly repayment. This should simplify your budgeting, and, in theory, help you keep up repayments on time and in full.  

For those mortgage-holders who are part-way through a fixed deal, you do not always have to break your deal and pay penalties to obtain a debt consolidation mortgage. There are ‘second mortgages’ or ‘secured loans’ as they are also known, that can sit alongside your main mortgage. This will mean, of course, that your finances are not quite as simple as having one payment to one provider: Instead of having only one payment, you would have two payments. 

The Importance of Advice 

There are lenders in the UK that provide mortgages for debt consolidation purposes. Getting a lender to approve a debt consolidation mortgage will depend on your circumstances: income, credit history and the level of equity in your property. Navigating these criteria is not simple, so an independent mortgage adviser should be used to source the most suitable option. 

Debt consolidation is not always the right answer. Some unsecured debts could already be on low rates, and the best thing to do might be to chip away at them as they are until they are settled. An independent mortgage adviser will do the maths for you and advise you on the best course of action. 

If debts feel like they are getting out of control, it could be advisable to speak to a debt relief charity. Again, a regulated mortgage adviser should be the first port of call, as they can do an initial assessment on your finances and advise on next steps if debt consolidation is not the best way to proceed. 

SmartR Finance are independent mortgage advisers with whole of market access, and debt counselling expertise to appropriately assess individual circumstances for debt consolidation.  

If you are interested in a loan consolidation, contact your Genistar representative.

Genistar are an introducer to ‘SmartR Finance’ (a trading name of SRFG Limited, who are regulated by the Financial Conduct Authority under firm reference 927198). Genistar do not provide debt counselling or mortgage advice. 
It is important to consider the implications of adding your debts onto your mortgage. Consolidating debt may reduce your outgoings now, however you may pay more interest over a longer mortgage term. Your SmartR Finance adviser will talk you through the full implications of any proposed consolidation. 
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