Consolidating debts means putting all your outstanding loans into one loan. You can do this by either
By consolidating all your debts into one loan you may be able to drop your interest rate. If you have credit card debt, you may be able to consolidate this into a personal loan for a lower rate.
Mortgages are among the cheapest forms of credit available because the loan is secured on your home. If you roll all your credit card debt and personal loans, which have higher interest rates, into your mortgage, you will be able to pay off these loans at a much lower interest rate.
However, if you extend a five-year personal loan over 20 years, you will end up paying more overall even if the rate is lower.
Use our mortgage and loan calculators to check out the total cost of credit, so you can check which is the best option for you.
The term of your loan should match the lifetime of what you are buying. So for example, if you are using your mortgage to pay for short-term spending, such as changing your car, you should make sure that you repay the car loan part of the mortgage over a shorter term. A typical car loan is repaid over three to five years, whereas the mortgage term could be 20 years. If you pay for the car over 20 years, it will cost you far more in interest and you’ll be paying for it long after you have gotten rid of the car.
Some lenders offer flexible repayment arrangements so that the personal loan portion of the new consolidated loan can be paid off within the original term, but at the lower rate of interest.
Under the Central Banks Consumer Protection Code your lender must give you, in writing, an indication of costs of your existing loans compared with the cost of the new mortgage you are considering.
APRC
Extra cost of a consolidated loan over 20 years: €11,082 (€72,286 less €61,204)
Despite the lower APRC and lower monthly repayments, in the long run the new loan plan would cost you €11,082 (over 20 years) more than the original plan. This is because you are now paying for the old loans over 20 years, instead of the shorter original loan terms.
You can apply with your existing mortgage lender. Or you could decide to switch to another lender offering a cheaper mortgage rate, and take out a larger mortgage to cover the extra borrowing. Be aware that many lenders do not offer these types of mortgages at present.
It is quite flexible as long as you have a variable rate mortgage. If your lender will allow you to pay off your smaller loans over the shorter term than your original mortgage, it is even more flexible. A variable rate mortgage means you can pay more when you can and pay lump sums to reduce interest and clear your debt earlier than planned.
If you have a fixed rate mortgage, you usually cannot pay lump sums off your mortgage or clear your mortgage during the fixed rate period. However, a fixed rate will give you certainty that your repayments will not go up during the fixed rate period.
But you need to consider all the costs.
There are fees you may have to pay if you decide to consolidate your loans with your mortgage.
You should also remember that the new, larger mortgage is secured on your home and if you fail to make payments, your home could be at risk. Despite the lower rate of interest on the consolidated loan, you can end up paying more overall because the new loan lasts much longer than the original loans.