As an easy way of managing debts, consumers often opt to consolidate all their liabilities in one place, with homeowners being able to add the whole lot to their mortgage.
“Whilst including the consolidated debt in your mortgage can look attractive, in the long term it could prove to be a very expensive mistake,” advised Moneynet.co.uk chief executive Richard Brown.
With further Bank of England base rate rises predicted - some commentators suggest rates could climb to 8 per cent – borrowers could be saddling themselves with a much bigger debt than they can manage.
Brown said: “Monthly repayments of £300 for a personal loan of £15,000 over five years may seem expensive when compared to monthly repayments of just over £100 if consolidated into a 25 year mortgage."
“But the reality is that in the long run it will prove to be a more expensive choice. When consolidated into the mortgage the original debt of £15,000 could spiral to over £33,000 when the interest is added. This compares very unfavourably with the total amount repayable on the personal loan of just over £17,500.
“In other words, consolidating the debt into the mortgage means that you are likely to end up paying nearly twice as much,” Brown warned.
Recent statistics from Halifax Bank (Halifax May 2007) point to more and more homeowners staying put and extending their properties, rather than copping all the expense of moving.
“But that means expensive extensions, new kitchens, bathrooms and such like could result in an additional £20,000 or so being added onto the mortgage. In many cases it could be cheaper in the long term to negotiate a personal loan, thus restricting the number of years over which interest will be paid on the loan,” Brown added.
