Paying off multiple debts at once can be very stressful – and if these debts are not managed properly, they can end up costing you more and dragging you further into debt. If you have difficulty juggling multiple debts, consolidating them into one loan will help you manage your payments.
Refinance is another option. Consolidating other debts – usually a car or business loan, or a large credit card bill – into a mortgage is among the most common reasons why many Australians refinance their home loans. However, this strategy will not work for everyone. This is not the right route for everyone. It’s important to weigh all the pros and cons to decide if this is the right route for you.
How does a consolidation mortgage home for debt work?
Refinance your home loan to combine your existing debts and your mortgage. These debts will be repaid on a weekly, fortnightly, monthly, or at a lower interest rate. If you have multiple lenders, you can combine all of your debts with one lender. It is possible to consolidate multiple debts (personal and business, as well as tax) into one home loan.
What should you do before consolidating your debts into a mortgage?
Consolidating debt will allow you to take control of your finances. Before you decide whether consolidating your debts into a home loan is the right choice, there are many things that you should consider. Here are some:
1. Rates of interest
When you combine debts into your home loan, ensure that your mortgage interest rates do not exceed other loans. You might end up paying more if you do not.
2. Break and set-up charges
Refinancing your mortgage to consolidate debt may require you to pay several fees. A break fee will be assessed if you decide to refinance your home mortgage within the time limit. The costs of resolving a loan that is not in your favor are higher for homeowners who have fixed-term contracts. Experts recommend waiting until the fixed term ends before refinancing, especially if break costs are too high. New lenders may charge additional fees, such as a loan application fee.
3. Conditions for payment
Home loans typically have a longer term than other debts. You should check to see if there are ways you can save money. A lower interest rate might sound appealing but it can end up costing you more in the long-term, especially if your mortgage term extends over 20-30 year.
What are the benefits of consolidating home loan debts?
Consolidating your debt into one home loan has many benefits. These benefits include:
- Because home loans rates are generally lower than other debts like credit cards or personal loans, you will pay a lower rate of interest.
- You can manage your debts better by making one regular payment.
- Budgeting and cash flow management are better
- One lender will be your only, meaning less paperwork and faster processes.
What are the drawbacks to consolidating home loan debts?
Refinancing to consolidate debts and get a home loan has its drawbacks. Here are some examples.
- While your home loan interest rate might be lower than other loans, it may accrue for longer periods of time because your mortgage term is longer.
- Break and upfront costs can run you several thousand to several thousands.
- Refinance applications will be rejected if you have poor credit. This will also affect your credit rating.
- Lenders might require you to get mortgage insurance if your loan to value ratio increases above 80% as a result of debt consolidation.
You can consolidate debt to help you better manage finances. This is not the way to solve all your financial problems. You need to examine your spending habits and find out what works for you in order to get rid of debt.
To find the best rate for your home loan, you should compare mortgage brokers and get sound advice.