With the recent rises in interest rates as well as general cost of living increases, many households are finding it difficult to balance the family budget. This makes it very tempting to refinance the home loan and possibly consolidate other, usually unsecured, debt into one loan with one monthly payment. For some, this can be a good strategy but there are some very important things to consider before launching into it.
Check with your Mortgage Broker or Lender if you can achieve your needs by simply switching to another product with the same Lender. Lenders are constantly updating their product ranges. A simple product switch or increase to the existing loan could avoid some hefty fees. This is particularly pertinent if the amount of you loan is greater than 80% of the value of your home, in which case costly Lenders Mortgage Insurance premiums would be charged if you change to another lender, or if your existing loan has been in place for less than 3 to 5 years in which case an Early Repayment Fee could be charged by your Lender. Also if you are currently on a fixed interest rate you may be liable for break costs which can be significant.
If you have a lot of unsecured debt, such as credit cards, car loans and the like, then a debt consolidation can take those loans which are usually at a much higher interest rate and put them into your home loan. Whilst this can have the effect of reducing your overall monthly loan repayment burden and therefore assisting you in balancing your personal budget, it can also be a real trap. This is because you will be taking a debt that is repayable over a term of 5 to 7 years and rolling it into debt that will be paid off over 25 to 30 years. So even though the interest rate on the combined home loan and other debts is much less than the interest rates on the personal loan or credit card, because you will be paying it off over a much longer term you will end up paying a lot more. However, it may be a good strategy, provided you try keep the total repayments per month on the new loan as close as possible to the total repayments prior to the consolidation. In other words, if you still plan to repay the personal loan within the original term of the personal loan then you will save money.
One big thing to remember with debt consolidation is by taking those other debts and rolling them into your home loan you are effectively reducing the equity in your home which has a direct effect on your net wealth. So whilst a debt consolidation may assist you in getting out of your short term financial trouble, you need to take positive steps to ensure that you don’t allow the same situation to happen in the future.
A good mortgage broker, who is accredited with the Mortgage and Finance Association of Australia, can assist you, not only in the refinance and debt consolidation process, but can also assist with your budget planning to ensure you reap the financial benefits in the future.
Filed under: Budgeting, Finance Tips, Home Loans & Mortgages, Bernie Lewis Home Loans, debt consolidation, home loan, mortgage broker, refinance
