April 05, 2016
With Australia now having more household debt than the country’s GDP, it’s no wonder people are looking for different ways to pay off their loans and get ahead.
One option many people turn to is rolling their personal loans and credit card debt into their home loan. This involves reviewing your existing debts and mortgage, and consolidating them into a new home loan. With home loan interest rates currently sitting at a historically low level, now is a good time to consider this option.
Depending on your level of debt, debt consolidation can help you to better manage your repayments and avoid the high interest rates attached to personal loans and credit cards. Whether it’s the right strategy for you will depend upon a number of different factors.
Benefits of debt consolidation:
- It is a straightforward way to manage high-interest debt.
- You only make one repayment per month at your home loan interest rate, which is often much lower than the rate of a credit card or personal loan.
- Your loan time frame is extended, allowing you more time to pay. Most home loans are held for a period of 15–30 years.
But as with any matter concerning your personal finance, there are a number of factors to consider before consolidating your debt.
Things to consider:
- Turning a short-term loan into a long-term one could mean you end up paying more interest over time, and the debt will stay with you for longer.
- You may be liable for hidden fees and charges.
- Some people often fall into the trap of getting further into debt by clearing a credit card only to continue using it afterwards or applying for additional cards. If this is a habit you have developed, work on setting a budget and sticking to it, or even cutting up the credit card.
- Credit card debt is considered unsecured debt, meaning it is not attached to an asset. Once it is combined with a home loan and attached to your property, it becomes a secure debt. This poses a risk in the event that you default on your loan, as the bank may be forced to sell your home.
Before you decide to refinance, speak to your credit provider, as they may be able to offer a solution to help you meet your repayments. Look carefully at how much debt you have in total, how much interest you are paying and how long you have left to pay it off. If the debt is becoming unmanageable, you may need to seek help from a financial adviser or counsellor.
If you do decide that consolidating your debt is the right path to take, it can help to speak to a mortgage broker to discuss the types of loans available to you and to ensure your new loan is structured in the best way possible. Ideally the cost of the new loan, including fees and interest, will equate to less than what you were previously paying on all of your individual debts.
Before consolidating, it’s very important to compare interest rates, fees and charges across a variety of providers, check the loan terms and consider your job security and ability to meet repayments well into the future.
Have you consolidated your personal debt into a home loan or do you know someone who has? We would love to hear your experience in the comments.