Consolidating debts

Consolidating debts means putting all your outstanding loans into one loan. You can do this by either

• Taking out one personal loan to pay off all other debts
• Topping up your mortgage to pay off all other debts

Is debt consolidation cheaper?

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.

What term should I look for?

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.

Costs

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.

Original mortgage and personal loan plan

Loan details	Amount owing	Remaining term	Typical APRC	Monthly payments	Cost of credit
Existing mortgage	€100,000	20 years	4.1	€607	€45,750
Home improvement loan	€30,000	7 years	7.9	€462	€8,811
Car loan	€18,000	5 years	8.5	€367	€3,995
Personal loan	€10,000	5 years	10.1	€211	€2,648
Total	€158,000			€1,647	€61,204

New consolidated loan plan

	Amount owing	Remaining term	Typical APRC	Monthly payments	Cost of credit
New mortgage	€158,000	20 years	4.1	€959	€72,286

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.

Where can you apply for consolidated loans?

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.

How flexible is it to consolidate your loans with your mortgage?

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.

Fees and charges you may not have thought about

There are fees you may have to pay if you decide to consolidate your loans with your mortgage.

Fee	Reason for charge
Valuation fee	This is a fee paid to a professional valuer to estimate the market value of your home. Some lenders may offer to pay for this.
Legal fees and outlay	This is the fee and other costs your solicitor charges for the legal work involved in changing the original mortgage deed. Some lenders may offer to pay some or all of your legal fees, so check this before you apply.
Mortgage protection insurance	This is a life insurance policy that will pay off your mortgage if you die during the term. You need to increase the amount of cover if you consolidate your loans with your mortgage.

Risks

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.