Debt Consolidation with Repayment Mortgage
With a repayment mortgage, also known as a capital repayment mortgage, you make monthly payments which contribute towards the total amount borrowed and the interest payable. Therefore each month you repay back the interest charged since the last month, plus some of the actual loan. Assuming you continue to make all your monthly contributions in full, the mortgage is guaranteed to be paid off in full at the end of the arranged mortgage term, unlike mortgage type linked to investments.
During the early years of the mortgage, the majority of each monthly payment goes towards paying the interest owed. The amount paid off each year increases as the mortgage term progresses.
Advantages of a Repayment Mortgage for Debt Consolidation
- Provided that you make all the required monthly mortgage payments, you are guaranteed to pay off your mortgage in full by the end of the repayment period.
- It removes the risk of having an investment, the performance of which is dependent on the stock market.
- You are less likely to suffer from negative equity because your mortgage balance will be reducing month on month.
- Assuming your property has not dropped in value, as the capital repaid increases you will see an increase in the level of equity in your property. Consequently, when you remortgage or move home you may find it easier to obtain a mortgage and you may be able to avoid paying a Mortgage Indemnity Guarantee.
Disadvantages of a Repayment Mortgage for Debt Consolidation
- You would be unable to benefit from the stock market if it has performed well over the period of the mortgage. Therefore, there is no possibility of being able to pay off your mortgage early or receiving an additional lump sum at the end of the repayment period.
- Because little of the amount borrowed is paid off in the early years of the consolidation loan, if you were to consoliate debts again in those early years it is likely that you would need to take out a new 20/25 year repayment mortgage, in order to make monthly repayment amounts manageable. i.e. the period for paying off your debts could be extended.
- Depending upon the type of deal you are on – the interest rate may rise or fall with Bank of England mortgage base rate. The base rate is currently at historically low values, and is likely to rise over the duration of the consolidation loan agreement.