Debt is something which seems entrenched in our lives because we all have motive and opportunity. Our motive is bigger, better, newer, more expensive things and opportunity is everywhere, when we receive another credit card offer with a free gift, or a preapproved credit limit increase on our card, or when we want to buy the bigger, better, newer, more expensive TV and we’re offered a store account, to be paid off later.
Regardless of how you’ve gotten yourself into debt, you can get yourself out, because while you may have been a little reckless with your credit card, one debt you do take seriously is your home loan. If you make your home loan repayments on time and have been paying off your loan for several years then you may be able to apply for a mortgage debt consolidation loan.
A mortgage debt consolidation loan will combine all of your high interest debt such as credit cards, personal loans and store credit accounts, into your home loan so you can pay off the amount at a much lower interest rate. A mortgage debt consolidation gives you the opportunity to take advantage of one of the lowest interest rates of any form of finance by paying off your debts as part of your home loan.
The loan works by accessing the equity you have in your home to pay off your debts. For example, if your home loan balance is $200,000 on a home which is valued at $300,000 then you can draw down the $20,000 you need to pay off your credit cards and your personal loans, and make one payment each month to your home loan. Because your debts are now secured against the security of your home, you can pay them off at a much lower interest rate than a standard debt consolidation loan.
Plus, while the value of your home loan has gone up and so have your repayments, your monthly outgoings will be the same, if not less, because the debts you were repaying were made up primarily of high interest charges, which have now been converted to your home loan.
Benefits of Mortgage Debt Consolidation
Consolidating your debts into your home loan can offer you financial freedom and help you get your finances back on track. You’ll also enjoy benefits such as:
- Reduced monthly outgoings. When you are paying a mortgage, personal loans and credit cards you will be making a lot of payments and be paying a lot of interest. However, when you consolidate all of your debts into your home loan you reduce the amount of interest you are paying and you increase the term of those other debts to be the same as your home loan. Therefore, with less interest to pay and more time to repay your debts, you can reduce your monthly outgoings by between 35% and 50%.
- A secure loan. Personal loans and especially credit cards are unsecured loans where the lender is not able to take anything from you if you default on the loan. However, a home loan is a secured loan as the security is the property itself, which the lender can take and sell if you can’t make your payments. A secured loan has a much lower interest rate than an unsecured loan as you are a lower risk to the lender, and are rewarded with lower repayments.
- One payment each month. Rather than paying each of your credit cards and loans on a different day of the month and having to juggle your budget, when you consolidate your debts into your home loan you only have to worry about one monthly payment which takes care of all of your obligations.
Can you Benefit from Mortgage Debt Consolidation?
Before you decide to consolidate all of your bad debts into your home loan, you need to determine whether you are suited to a mortgage debt consolidation. This not only means considering whether you can benefit, but also looking at your financial habits and history, and whether you can maintain your new financial freedom and security. When you use your home equity to repay your credit card debts, the balance of those cards goes back to zero. As a result it can be very tempting to go out and spend on those cards again. Therefore, if you are the sort of person who won’t be able to resist this temptation then you won’t be suited to a mortgage debt consolidation either. Unless you are able to learn from your mistakes and make radical changes to your financial behaviours, you will keep accumulating debt, and next time there won’t be any equity in your home to bail you out.
Choosing a mortgage debt consolidation loan will also depend on your age because as you increase the amount of your mortgage to cover your debts, you also increase the amount of time and money it takes to repay your mortgage. Everyone should have the goal of repaying their mortgage before they retire but if you are already approaching retirement age, coming to the end of repaying your mortgage, then debt consolidation into your home loan may not be for you.
To make sure you are suited to a mortgage debt consolidation loan you will also need to make sure you can afford the repayments in your budget. This means budgeting for an emergency where your funds are diverted elsewhere, as well as an extended emergency such as losing your job or becoming too ill to work. Also consider what your future holds and whether you will be able to maintain your household income, for example are you planning to start a family and be a stay at home parent? Your future plans are also important if you plan to move house in the next five or ten years, because often a mortgage debt consolidation loan will lock you into a fixed term, and to buy your next house you will have to cover loan refinancing costs.
Also remember that while a credit card and a personal loan are a repayment burden, they are also helping you build up your credit rating. However, when you combine all of your debt into one loan, you are limiting your ability to prove your financial responsibility.
The value of your property and other properties in your area can determine the value of your equity and you want to make sure you are not over valuing your property and drawing on equity which is only there as the result of a property bubble. If this is the case, you will have over inflated the value of your home loan, which can mean you come to owe more than your house is worth.
