How to Refinance to Consolidate Debt


May 18, 2018

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If you are overwhelmed by your credit cards, personal loans, and other debts, you should look into refinancing your home loan so you can consolidate debt. No one plans to build up a sizable credit card balance or end up with more loan repayments than they can keep track of. But, the reality is, life is unpredictable. And, unpredictable can become expensive.

Unless you have a solid emergency fund in place to cover job loss, unplanned relocation, and braces for the kids, you’ll have to get personal financing to cover your expenses. The more debt you have, the harder it is to get out of.

Many Australians use a debt consolidation loan to help reduce their debt load and save money. When you refinance, instead of having to pay down numerous loan accounts – a mortgage, an auto loan, credit card debt and a personal or business loan – all with different interest rates and terms, you can roll all your debts into one, manageable payment. Plus, you’ll get to use your home loan interest rate, which is likely significantly lower than your credit card rates.

What do you have to gain?

A lot more than you think. Of course, you’ll enjoy peace of mind when you only have to worry about one repayment each month. Even better, you could save money.

When you consolidate your debts, you could save when you switch to one loan with a lower interest rate to cover everything – which for most people is their mortgage. In fact, this is why debt consolidation alone is a good reason to refinance your mortgage.

If you added up all the interest you could save each month by paying all of your higher interest debts as your low mortgage rate, you’d probably call up your lender the minute you finished reading this to find out about refinancing for debt consolidation.

But, as with all things in your financial life, there’s a right time and a right way to do everything, and it always revolves around your unique personal financial lifestyle, circumstances, and goals. Read on to find out when it makes sense to consolidate, how much it will cost you to do so, and how to go about refinancing so you can simplify your repayments and save.

When Is a Good Time to Consolidate Debt?

Often the driving force behind debt consolidation is to lower your repayment amount. When you refinance, your repayments will decrease with your lower home loan rate and a longer term.

For example, if you started with a 30-year loan and you’ve been paying down your mortgage for three or four years, and then refinance to a new, 30-year home loan, your mortgage repayments will decrease. If you wanted to include $25,000 of your other debts into your new loan, you could refinance to cover this amount as well, slightly increasing the repayments on a new 30-year loan. The result? Lower monthly mortgage repayments and you’ll only have to make one repayment each month, simplifying your finances.

Financial experts suggest that if you have more than three debts, it’s time to consolidate. And, if you are like most Australians, you may be swimming in the stuff. The average consumer is carrying around $4,200 of high-interest credit card debt, which means about $700 goes towards interest, every year. And that’s just for your credit cards. Add an auto loan and a home loan, and it’s easy to see how the average person can get caught in the debt trap.

Today, Australian household debt levels are some of the highest in the world.

The good news is, you can often refinance your home loan and roll all of these debts into one, lower the amount of interest you owe and increase your disposable income. This means more money to pay off your loan faster, which is the key to getting out of debt.

You want to pay more than the minimum repayment to reduce the overall, long-term cost of your household debt. This is a lot easier to do when you are only managing one repayment because you can see the total that you owe and how much each little bit extra that you pay it down above the minimum makes a difference.

What Costs Are Involved?

There is a catch. Refinancing to consolidate debt isn’t free.

You’ll have to pay the typical refinancing costs, like application and exit fees, and property valuations. Typically, a lender will charge you an application fee because you are taking out a new loan. You may also incur an exit fee from your old loan if you took this out before June 30, 2011. Property valuations are done to make sure that the property is worth more than you are borrowing.

This is why you don’t want to keep refinancing every time you build more debt outside of your mortgage. Which means, once you consolidate, you should create and commit to a budget. This will help to prevent you from having to rely on your credit cards to make purchases, which can just create more debt.

It also means you want to weigh the costs against the benefits. How much will you save in interest? Will your interest savings outweigh your expected refinancing costs? Are you refinancing for other reasons as well, such as to get a lower rate or to switch to a different type of loan? How will these advantages stand up against the costs?

To work out if refinancing is cost-effective for you, write down all of the expenses associated. Include what you’re currently paying for all loans monthly and the cost of your new home loan. Then work out if you will be better off refinancing or not. Make sure you include any fees and charges for both loans.

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How to Refinance to Consolidate Debt

Before you rush out and see just any lender to consolidate debt, make sure you do some research. Many financial institutions will tell you that they can fix your financial problems in a heartbeat. But the truth is, rushing in may be far costlier than you thought.

You could extend the term of your loan to lower your repayments – even though you don’t need to – and in the process, end up paying more in interest on your mortgage. Another common pitfall is missing out on better opportunities because you didn’t take the time to compare your options.

Make sure to review all costs and then compare these to other loans on the market. Don’t just look at interest rates. You also want to compare loan features – which loan products will give you the flexibility you want – as well as factors like the level of customer service and convenience that your lender offers.

After crunching the numbers, if you find that refinancing is right for you, it’s time to start researching. The best way for you to do this is to compare lenders and their home loan products. Make sure you look specifically at refinancing to consolidate debt packages. If you don’t have great credit, explore your options with alternative lenders, who are more likely to work with borrowers with poor credit. In this case, you may also want to talk to a mortgage specialist to help navigate the process. When it comes to your money, usually the more you know, the more you’ll save.

Lastly, make sure you lower your credit card limit after you have paid off the credit card. By taking this action, you will prevent yourself from incurring further debt.

How Do You Know Refinancing Is Right for You?

Refinancing does come with some risks. You’ll have to pay refinancing fees in order to switch to a new loan. If your credit isn’t as good as it was, you may not be able to refinance to a competitive rate, which means you won’t save as much money as you had hoped by consolidating. You should rethink refinancing if you have to borrow more than 80% of your home’s value. Borrowing over 80% will mean you’ll have to pay lender’s mortgage insurance.

To assess if this option is right for you, sit down and talk with a mortgage specialist or other financial professional. You need to examine how much you’ll save when you consolidate and make sure it is more than the amount you’ll pay in refinancing fees. Also, keep in mind when you refinance to a longer term, you’ll increase the overall interest you’ll pay. Debt consolidation can make your life a lot easier. Just make sure you work out the costs and benefits to decide if it is worth it for your unique circumstances.


Written by Refinancing.com.au

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