What you need to know before you consolidate your loans.
Managing Several loans can be difficult and sometimes stressful. A way to simplify your financial situation and hopefully save money is to centralise your Loans. But here’s what to consider before you consolidate your loans.
When you borrow money, the most important thing is being able to stay on top of your repayments. But there are many factors that contribute to this, such as your interest rate, how much you’re borrowing and for what length of time.
Consolidating your Loans means combining what you owe into a single loan or a different loan type, and this can be a way of knowing what you need to pay and when, and reducing additional costs.
A quick online comparison of the loan rates offered by the big banks across different types of loans spells out just how much you may be able to save by moving debt into a different loan type.
As an example, owner-occupier principal and interest loans of $150,000+ over 25 years currently range between 3% and 4%. Personal loans between 10% and 13%, and credit cards between 12% and 14%.
Debt can impact your mortgage application
When a lender assesses your application for a home loan, one of their first steps is to consider just how able you are to pay the loan back as required using your credit score. Your credit score factors in your existing repayments on credit cards, personal loans and other debts – including buy-now-pay-later products like Afterpay or store cards. By reducing the amount you need to repay each month, you could be considered to be better equipped to make loan repayments. This doesn’t just impact whether you’ll be approved or not, your credit score will also help a lender determine just how much they’ll lend you based on what you’re able to repay and have been able to repay in the past.
Although it might mean putting off your new home purchase for a short period of time, it can be a great idea to pay down as much existing debt as possible before you apply for a home loan. Or, use another available strategy to consolidate it into the one stream.
How can that work for you?
Let’s say you have two credit cards, a personal loan and a mortgage to pay off. Juggling these different loans with different fees, interest rates and payment dates can be tricky. Consolidating them into one stream – a refinanced or redrawn home loan – or a different loan type, could mean there’s just one payment date to hit, one interest charge and one set of fees.
Consolidating debt into your home loan
Many lenders offer specific debt consolidation loan types, but these aren’t the only options available, especially if you already have a mortgage. The interest rate on a home loan, particularly in the current economic climate, is likely to be a lot lower than the interest rates on other types of debt.
If you already have a mortgage, you need to choose between refinancing with your current lender or applying with another lender. It’s a great time to review your current situation and shop around for a more competitive interest rate on your loan.
If you’re a first time buyer, this can be more difficult than just taking out a home loan, but some lenders offer debt consolidation into new mortgages.
Remember, in order to refinance your existing mortgage into one that allows you to consolidate loan, you will need to have sufficient equity in your home. And the more of your existing home loan you’ve paid off, the higher your chances of being approved for a new mortgage that consolidates your loans.
Be aware that these have an even more stringent application process than a mortgage that doesn’t include debt consolidation – you need to have a good record of paying off your debts in the past, and may need a guarantor because you’re considered a higher-risk lender.
Is Consolidating Loans right for me?
While consolidating your loans into one place might seem like a “magic bullet” for a complicated financial situation, there can be drawbacks.
Consolidating your finances to reduce debt can be a complicated process, so it can pay to get professional finance help before you make a decision. And if you’re interested in consolidating debt into your home loan, speak to a qualified mortgage broker today.
You always need to consider the upfront costs of consolidation and refinancing. Your current loan provider might charge a closing fee, especially if you have a fixed-rate loan. And your new lender may charge a set-up fee.
It’s worth considering the fact that you may be consolidating short-term loans into a much longer term loan like a mortgage, for example. While you may be moving debt from a high interest-rate setting to a low-rate one, you may be stretching the life of the loan, so do the sums on total repayments. After all, the majority of Australian home loans are taken out for a 25 to 30 year period.
While it makes sense to have your debt in one place for easier management, there are circumstances where not consolidating – for example, due to the structure of your mortgage – can lead to greater flexibility and make paying things off easier. A great place to start is talking to a mortgage broker.
Need some Advice about loans?
A mortgage broker can help you find the right loan and secure the finance that’s most suitable for you. It will also ensure you avoid making mistakes.
Any questions you may have regarding loans, contact Annette Tothill on 0420 973 551.