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Consolidating debt with a home loan refinance
Consolidating debt with a home loan refinance can substantially reduce your monthly commitments and help you get your finances back on track. By refinancing to a low rate home loan and combining multiple small debts like credit cards, car loans and personal loans which come with high interest rates you can save thousands on monthly repayments.
The benefits of consolidating debt with a home loan refinance may include:
- Reducing your overall monthly repayments. See the example of Mark and Tracey below to get an idea how you could save on your monthly repayments.
- Reducing the interest rate you pay on your debts. A home loan interest rate can be as low as 3.6% compared to some credit cards and personal loans which can be as high as 25%.
- The ease of a single loan repayment with just one lender
- Reducing annual fees and other additional charges on multiple debts. Many credit cards, personal loans and car loans have annual fees on top of their interest rates so by consolidating to just one loan, you can relieve yourself of these multiple fees.
- means of providing a clear timeline outlining when you’ll be debt-free
Here is an example of how consolidating debt with a home loan refinance could work
Mark and Tracey have three seperate loans
- 30 year home loan of $450,000 @ 4.2%. Monthly Repayment = $2,200
- 5 year car Loan of $23,000 @ 14.5%. Monthly Repayment = $ 541
- Credit card debit of $5,000 @ 18%. Monthly Repayment = $458
Their current total monthly repayments =$3,199.
If Mark and Tracey consolidated their 3 debts, which total $478,000, into a new 30 year home loan at the same interest rate of 4.2%, their monthly repayments would be reduced to $2,337 saving them $862 every month.
If they decided to make additional repayments on the new home loan by continuing to pay the higher amount of $3,199 each month, that they had been previously paying on the 3 separate debts, Mark and Tracey would reduce the time to pay out the new home loan by 12 years, 4 months and save $163,836 in interest.
With the current cash rate in Australia being the lowest in history, home loan interest rates are extremely low and lenders are competing for your business so Mark and Tracey may be able to get a new home loan with a rate even lower than their current 4.5% and save even more money when they refinance.
Assured Lending Mortgage Brokers compare over 20 of Australia’s leading lenders to find the right loan product and the most competitive rate for our customers. In some circumstances, we can also negotiate discounted rates with the lenders which are lower than their advertised rates.
How to consolidate debts into your home loan?
If you've had your home loan for a few years, you most likely have equity in your home from 2 factors. Firstly you would have paid off some of the original loan and secondly, the value of your property has increased. This means you can now use your equity to refinance a home loan and pay out your other debts. As a general rule, lenders will allow you to borrow up to 80% of the value of the home without needing to pay LMI or Lenders Mortgage Insurance. You can borrow more than 80% of the value of your property but you would incur a fee for Lenders Mortgage Insurance and may have a higher interest rate. Click here to get a free online property valuation report to see how much your property may be valued at today.
Things to consider before consolidating your debts
Before you decide to refinance your home loan and consolidate your debts, you need to consider all the fees and know exactly what you are committing to.
- Lender fees – these could include an exit fee on your existing loan, an establishment fee for your new loan, and ongoing loan fees such as annual fees and charges.
- Government fees – these include stamp duty, taxes and other government levies that may be incurred.
- While you may be paying a lower rate of interest on your credit card or personal loan debt, once you refinance, stretching it over 30 years means more interest, unless you make additional repayments to clear out the debt faster.
- If you are getting assistance with your loan from a Mortgage Broker, ask if they charge a fee for their services. Most Mortgage Brokers do not charge a fee as they are paid by the Lender. Make sure the Broker is registered with the Australian Securities Investments Commission (ASIC) and also see if they are a member of a mortgage association like Mortgage Finance Association of Australia (MFAA) or Finance Brokers Association of Australia (FBAA).
- Never use the services of a Mortgage Broker or credit provider who ask you to sign blank forms, ask you to provide false information, or advise you to sign something without reading the paperwork.
An Assured Lending Mortgage Broker will help you identify the costs of refinancing your home loan and ensure the loan is in your best interests. We will give you information on a range of the most suitable options from different lenders and we will provide you with a detailed preliminary assessment of any proposed loan so you have a full understanding of the financial commitment. If you decide to go ahead, we will put the application together for you and liaise with the lender on your behalf. We do not charge a fee for our services and all advice is completely obligation free.
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