When Consolidation Makes Sense
Consolidating personal loans into your mortgage makes the most financial sense when your loan interest rates are significantly higher than your mortgage rate, the remaining loan balances are substantial enough that the monthly savings are meaningful, and you're already planning to remortgage (so you'd incur the remortgage costs regardless).
It's also a practical choice if you're juggling multiple loans with different payment dates and amounts. Consolidation simplifies everything into one payment, reducing the risk of accidentally missing a payment and making it easier to manage your household budget.
When It Doesn't Make Sense
If your personal loan is nearly paid off (say, within 12 to 18 months), the total remaining cost is relatively small and the benefit of consolidation is minimal. Similarly, if your loan rate is already close to your mortgage rate, the saving in interest is negligible while the extended repayment period works against you.
Personal loans from some lenders carry early repayment charges. If the charge is significant, it might wipe out any savings from consolidation. Always check your loan agreement or ask your lender for the early settlement figure before proceeding.
Running the Numbers
Here's a practical comparison. A £10,000 personal loan at 7% with two years remaining would cost approximately £720 more in interest to clear. Adding that £10,000 to a 20-year mortgage at 5% would cost approximately £5,900 in total interest.
The monthly payment on the loan might be £450, while the extra mortgage payment would be around £66 — a saving of £384 per month. But the total cost difference is stark: £720 versus £5,900 in interest. Unless you overpay the extra mortgage borrowing aggressively, consolidation costs you over eight times more in interest for this scenario.
The Smart Approach
If you decide to consolidate, commit to overpaying the extra mortgage borrowing by at least the amount you would have been paying on the loan. This way, you clear the consolidated debt in a similar timeframe and the total cost stays comparable — while gaining the benefit of a slightly lower interest rate in the meantime.
For example, if your loan payment was £450 per month and the extra mortgage costs £66 per month, overpay by the remaining £384 each month. You'll clear the extra borrowing in roughly the same two years and save money compared to the original loan rate. Most lenders allow overpayments of up to 10% per year without penalty.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.