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Life can hand out surprises to anyone, and you could find yourself struggling to pay off your debts for reasons beyond your control, such as an illness, a bitter divorce or a loss of job.

If you find yourself under a mountain of debt – be it a credit card loan or a personal loan – take a deep breath and relax. Managing multiple debts can be stressful but, as a homeowner, you could always turn to your biggest asset, your home, for help.

 
Using your home loan for debt consolidation
 


Here’s how..

Like many Australians, you can tap into the excess borrowing capacity of your home (or equity) to pay out higher interest rate debts by consolidating them into your home loan. Once you refinance your mortgage to consolidate debt, you only need to make one single repayment each month instead of repaying multiple debts.

With debt consolidation, not only is it easier to keep track of a single repayment as compared to making multiple repayments each month but you also end up making considerable savings each month (by refinancing high interest rate debt into a low interest rate mortgage) that can be pumped into your home loan to pay it off faster.

(In case you are facing severe financial difficulties, you could seek financial advice or counselling on the National Debt Helpline at 1800 007 007.)


Refinancing to consolidate your debts

Most people consolidate their debts to make their loan repayments more affordable and manageable. It is possible to consolidate credit card debt, car loans and personal loans into your mortgage. However, refinancing is not free, and this strategy is beneficial only if the cost of the new loan is less than what you are paying on all your debts combined.

To consolidate your debts into your home loan, you would need equity in your home, which depends on the current market value of the home. You can always have your house appraised or grab a free property report for information on comparable sales in your neighbourhood that can help you determine the current value of your property.

Most lenders will allow you to expand your loan to 80 percent of your property’s value. It might be possible to borrow up to 90 percent with some of the lenders on payment of lenders mortgage insurance. A mortgage broker could guide you to the right lender for your situation.


What to know before you refinance your home loan

While you may be struggling to keep up with your debts, it is strongly recommended to keep making the minimum repayments on all your debts as you look for a suitable option to refinance your home loan. This is important because lenders require a clean repayment history and you don’t want a spoilt credit report that will mar your chances of refinancing to improve your cash flow.

Besides, before you refinance, we suggest you compare home loan deals to find the best offers on the market. Apart from lower interest rates, you must look for borrower-friendly features such as offset accounts, free additional repayments and redraws to save interest on your home loan.


Advantages of consolidating your debts into your home loan

  • You only need to make a single repayment each month, which is easier to manage and reduces overall costs.
  • Better cash flow, thanks to a lower interest than what was payable on all the loans combined previously.
  • Protection from future interest rate rises, as personal loans or credit card debts are likely to have a higher interest rate than your home loan, and if these rates rise, your combined repayments are going to be much higher.


Before you refinance…

Debt consolidation is a financial strategy (and not an investment strategy) that could help you wriggle out of financial strain by leveraging the equity in your home. However, homeowners must remember that by rolling over several smaller debts into their home loan, they are increasing the borrowings on their home, putting the pledged property at a higher risk.

Besides, while it might sound lucrative to wrap your credit card and personal debts into your home loan to reduce your monthly repayments, you are refinancing high interest, short-term debt into low interest, long-term debt that could cost much more in the long run. In brief, consolidating a short-term debt into a 30-year mortgage could be more expensive over the years, even if the interest rate is lower.

To benefit from debt consolidation, your focus should be on repaying the extra debt as soon as possible once you refinance. Besides, make sure your new interest rate, including fees and costs, is lower than what you’re paying on all the debts you are consolidating. If that’s not the case, you’re losing money and making your problems worse. Note that some lenders levy a penalty for prepaying your loan that can add to the cost of refinancing. If you think consolidating your debts is the right move for you, contact a verified mortgage broker to understand your situation better.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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