October 10, 2018
There are more benefits to having a home loan than most people realise. One of the most powerful advantages of being a responsible mortgage holder is the ability to use your home equity to improve your financial situation.
Having some debt is one thing. But struggling with credit cards and other high-interest debts can be awful. It can make your credit score and personal financial wellness take a nose dive whilst also causing your stress levels to skyrocket.
Once you start falling behind and aren’t able to pay your full balance each month on a credit card, those interest charges start eating into your disposable income, making it even more challenging to get ahead. When you are also paying down your mortgage, it can feel like you have a hefty financial burden hanging over your head.
But here’s the thing: it’s your biggest loan – your home loan – that you can use to help you get ahead again. When you refinance and consolidate your high-interest debts, you can take back control of your finances, your budget, and your life.
As long as you have been making your mortgage repayments on time and you have enough equity, debt consolidation is an option.
What are the benefits?
- You’ll be able to simplify your finances with one monthly payment.
- No more worrying about juggling payment due dates and incurring late fees because you missed a payment.
- You’ll be able to move your higher interest debts to a lower rate with your home loan.
- Often, when you use your home equity to consolidate, you’ll owe less in total each month.
- Over time, your credit will improve, which will open up even more doors for you financially to potentially help you save on financing in the future.
- You can direct more of your income towards savings instead of paying more in interest each month.
- You can make early repayments to get ahead of your mortgage, which could help you save a lot of money in the long run.
When you use your home equity to tackle all of your other debts, it’s important to make sure you don’t take on more debt. The reality is, when you fold your other balances into your home loan, you’ll free up credit. If you then keep spending with that credit but are not able to pay off your balance in full each month, the slippery slope of increasing interest payments begins again.
But, this time, you already used your home equity. You probably haven’t paid down your home loan enough – nor will you have strong enough credit – to qualify for another debt consolidation loan.
In other words, when you use your home loan to regain control of your finances, it is important to keep control. Create a budget if you don’t already have one. Focus on saving so you have money for unexpected expenses. And avoid relying on credit for purchases. If you don’t, you do risk getting into more debt when you have a debt consolidation loan, simply because you’ll have more credit.
There are two ways you will end up spending money when you use your home equity to help you with your other debts:
- Because you may be transferring your debts to a longer term – such as a new 30-year mortgage – the more time you are making payments, the more you will pay in interest.
- There are fees you’ll have to pay when you switch loans. Make sure you don’t end up paying Lender’s Mortgage Insurance when you refinance and check with your bank about any break costs to help keep the cost of changing loans as low as possible.
If you are struggling to keep up with your current financial obligations, using your home equity could be a sensible way to get ahead financially. If, on the other hand, you could adjust your budget or increase your income to help you pay off your debts, then you may not need to use your home equity.
To help you decide what may be right for you, here are some helpful questions to ask yourself.
- Calculate how long it will take you to pay off your non-mortgage debts with your current budget. Will it take more than a few years?
- Consider adjusting your budget – would you be able to pay off your credit cards and other loans in a reasonable amount of time if you cut out some of your expenses?
- Were you planning on borrowing money for other needs, like a new car or a home renovation project?
If you are looking at years and years of having to struggle to keep up with your payments and you don’t have much flexibility with your household budget, or if you are planning on a personal loan, using your home equity may be a smart move. You can always consult with a financial advisor or other professional to help you make the smartest choice for your unique situation.
Credit card debt and personal debts make up about 5% of debt for the average Australian household. If you want to consolidate your debts to get ahead, you can refinance to a new home loan, which will include your existing mortgage balance and the other debts you’d like to consolidate. Then, you can pay off the other accounts. You’ll be left with only your new, monthly mortgage repayment to worry about.
Here’s an example:
With $12,000 in credit card debt and a 17% interest rate: if you only pay the minimum you’d end up paying $38,228 in total and it would take 41 years and 1 month to repay the debt! According to ASIC MoneySmart’s calculators, your minimum repayment amount (which will decrease as the balance decreases) would be $244.
With a personal loan of $18,000 at a 9% interest rate and a 5-year term: you’d owe $384 each month.
With a $400,000 mortgage at a 4% rate and a 30-year term: you would owe $1,910 on your mortgage. In total, you would owe $2,538 a month.
If you refinance to a $420,000 home loan, because you’ve already paid down your mortgage to $390,000 and you want to consolidate your credit card debt and personal loan, at a 4% interest rate and a 30-year term, you’d owe $2,005 each month.
This means you could save over $500 a month by using your home loan to consolidate! You’d also shorten the time it would take to pay off your credit card if you were only going to pay the minimum amount, but you would end up paying down your personal loan for 30 years instead of 5.
Using your home equity could make a world of difference if you are currently managing a mortgage and a lot of high-interest debt. When you have enough equity in your home, it can be a useful tool for turning your financial situation around.
If you want to learn more about refinancing to get ahead financially and save money, contact us to speak with one of our refinancing specialists.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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