October 22, 2017
Like many Australians you could have several debts – probably a home loan, a personal loan, and possibly even a credit card balance.
Having multiple debts can cause a variety of headaches:
- It can mean juggling lots of different repayments, which can be stressful.
- You could be paying a lot more in interest each month than is necessary.
- You might have more cash going out of your pocket each month in repayments than you want, and not just because of the interest (for example, you might be in a contract to pay off all the principle on your car loan within 5 years)
You might not be getting the best deals either. Your personal loan and credit card could charge interest rates four times as high (or more!) than the rate you’re currently paying on your home loan.
Let’s see how it can work.
Let’s say Sue has 25 years to go on a home loan of $200,000 with a rate of 5%. She has a $15,000 personal loan costing 12% and $5,000 is owed on her credit card – attracting interest of 18%.
All up, Sue pays around $1,600 in monthly repayments.
Now let’s see what happens if Sue refinances her home loan to consolidate all these balances into one low rate loan.
Instead of juggling different debts, Sue only has to manage her home loan, now with a balance of $220,000. Instead of paying rates as high as 18%, she pays 5% on everything.
By refinancing this way, and assuming a 25 year loan term, Sue will pay a single monthly repayment of $1,286 – that’s over $300 less each month than she was previously paying.
This gives Sue extra money to live on. Or she can use the extra $300 she now has available each month to pay off her home loan sooner and save more in overall interest.
But that’s not all we can do.
If it’s been a few years since you got your home loan, then like Sue you can probably get a better interest rate. You can also ask for a brand new 30 year term if it suits the situation. The same home loan over 30 years at 4% interest costs $1,050 a month, which is $550 a month less than what Sue was paying.
Now, if Sue then paid the same $1,600 a month into this loan that she was paying into all her other debts, she will pay the whole loan off in a little over 15 years. So refinancing and consolidating your debts can make a significant difference in your life.
It is important to note that debt consolidation can also come with some downsides. It can turn a short term debt like a personal loan into a long term debt (your mortgage), and that means paying interest on the balance for a much longer period, which could cost you more in the long run. For debt consolidation to be truly cost effective, you need to commit to making additional repayments to pay off the enlarged loan as quickly as possible.