Bad Credit Mortgage - I like having bad debt

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Author: BakerF

Article source: http://www.articledeshboard.com/. Used with author's permission.

After speaking to a number of homeowner clients who have been advised by a well known debt advice charity to NEVER consolidate any debts into their mortgage I thought I would put something out there from the clients point of view - or at least the clients I have spoken to about why they may want to consider clearing bad debt and starting a fresh.

Based on my conversations with numerous people, I get the impression that the charities advising clients never to consolidate debts that they think clients enjoy both the stigma that goes with bad debt and the way clients are constantly penalised by high interest rates and larger fees due to their impaired credit. They seem to miss the point that, whilst the overall debt will increase as a result of consolidating into a mortgage the overall costs involved in doing nothing are equally as high for homeowners, whether they enter into some form of debt management plan or do nothing, both of which have their own consequences.

Is debt consolidation right for everyone.
Of course not, that's not what I am saying but it is right for some depending on what they want to achieve. Just for the record I am in favour of debt management and like most products available, if done correctly is a valuable resource for clients struggling financially but as mentioned previously everything has good and bad points.

Debt management - the good points
The client pays what is genuinely affordable
They will typically reduce stress and stop the clients being chased by lenders
Payments can be altered as the client's financial situation changes through time

The bad points would be something like
The client will have live bad debt registered on their credit file until the debts are repaid in full
The client will be penalised at every turn as far as future refinancing goes
There is no guarantee interest will be frozen, nor any guarantee future action will not be taken by the lender.

Now a typical debt management plan may look like this

Joe Bloggs owes £40,000 to 7 creditors paying an affordable £100 per month. 3 of the creditors have registered CCJ's and the rest have defaulted the accounts.

From my experience this would be typical, and I have years of experience in both debt management and remortgage clients out of debt management.
At the rate Joe Bloggs is going, and unless his circumstances change he is going to be paying the debs off for roughly 33 years (£40,000 divided by £100 gives 400 months, 400 divided by 12 gives 33.3 years)
Bearing in mind most people with a mortgage refinance about once every 2 to 4 years (lets say every 3 years as an average) then Joe Bloggs is going to get stuck with higher interest rates for the life of his mortgage, he is also going to get higher fees every time he remortgages. Most broker fees for this sort of thing are higher than the normal due to the work involved, as are most lender arrangement fees. These fees will typically be added to the mortgage amount, thus increasing mortgage borrowing and reducing equity in the property everytime he remortgages, that's not taking into account how much more he is paying each month over the term of the mortgage due to higher than normal interest rates due to the bad debt.

Should I apply for a Bad Credit Mortgage and consolidate the debt?
Again this is not right for everyone but if Joe were able to remortgage on a fixed rate for 2 years and it was affordable to him (bearing in mind on completion of the mortgage Joe would not be paying the debt management, he would be clearing the debts off which would more than likely mean a saving if he applied for reduced settlements), he would, as mentioned be paying increased fees and a higher rate of interest this time round but all his bad debt would have been repaid and next time round, when Joe remortgages, as long as he has not incurred any other bad debt, Joe could use practically any high street lender, have very low fees attached to a mortgage and be eligible for some of the best rates with the majority of high street lenders. Not to mention the fact that Joe would no longer have the worry and stress about the bad credit lurking in the background and from my experiences, the stress relief alone and increased standard of living (due in part to the stress relief) has to be taken into consideration when weighing up whether consolidating debt via a remortgage is a viable option for the client.

The point I am trying to make is that, whilst its not right for everybody it is the very best option for some and for a debt advice charity to make such a sweeping statement that no one should EVER consider consolidating debts into a mortgage is stupidity at its worst, or at best a lack of knowledge and client understanding. There are a wealth of other issues regarding this statement, for example, the debt charities are usually unable to help with CCJ's as they are priority debts but will offer little advice other than they have to be paid, but that's for another time, they do help a lot of people and one would have thought they would be more open minded.

Its not right for everyone but the clients I have spoke to are very glad to be rid of the bad debt, very happy that they can now use high street lenders again when they next remortgage and very happy they don't have to worry about how and if they will be able to remortgage due to bad credit.

Carl Baker who runs Baker Financial has years of experience in helping clients with bad debt obtain mortgage and remortgages throughout the UK. They can be found at www.bakerfinancial.co.uk