Now that the Christmas spending period is over now might be a good time to look at a debt consolidation loan, especially if you knocked your credit cards around over the buying season.
If you think you are going to have trouble making a credit card repayment because you have overspent, it’s best to act fast and deal with the problem before it develops into something more serious. A lot of people end up in more strife by putting off the inevitable when it could have been a relatively simple process.
It’s no secret that home loan rates are cheaper than credit card interest rates so it makes sense to investigate whether it is possible to refinance your home loan and incorporate all of your credit card debts at the same time.
Let’s take a look at the process and the advantages.
First, the advantages of this debt consolidation strategy.
Let’s say you have an existing home loan of $300,000 with a monthly repayment of $2056. (This is calculated as a 30 year loan at 7.3%). On top of that, let’s assume you have a credit card debt of $20,000 which requires a monthly repayment of $600. This means you have total monthly repayments of $2656
Now, if you were to consolidate the $20,000 debt into your home loan, the minimum monthly repayment required on $320,000 is $2194. This means that you can actually save $462 a month!
Alternatively, this type of debt consolidation loan can actually make it easy at to repay your debts even faster. How?
Well, if you were to continue making repayments of $2656 a month into the new home loan of $320,000, you would actually pay the loan off in just under 12 years earlier! That’s right if you make repayments of $2656 per month on a home loan of $320,000 it would be paid off in just 18 years instead of the usual 30 years. Additionally, by taking 12 years of your loan term you are actually saving yourself 12 years of repayments, or $382,464!!
It almost seems too good to be true, but if you can manage your finances correctly this is the type of saving you can look forward to.
Of course, another alternative would be to look at a personal loan that consolidates all of your existing non-home loan debts. The only disadvantage with this strategy is that a personal loan will be several percentage points dearer than a home loan.
Assumptions about using this debt consolidation strategy.
Before you start getting excited, you have to ensure that you will qualify for this loan in the first place. There are two things that you have to look at.
- Does your salary qualify for the higher loan amount?
- Do I have sufficient equity in my house?
The only way you can work out whether you are earning sufficient income is to ask a mortgage broker to do some income testing for you. Secondly, you have to ensure that the total amount of the home loan you will be seeking is no more than 95% of the value of your property.
If you can satisfy these two hurdles, the chances are you’ll be in a good position to get a debt consolidation loan that will place you in an excellent position. Of course, the figures we have talked about here only apply in light of current interest rates. As times change and rates change with some, not to mention your salary or personal circumstances, the overall strategy may need to be tweaked from time to time to make sure you stay on track.
There is no doubt about it that a debt consolidation strategy such as this has tons of advantages but you will also have to learn to exercise some restraint by cancelling your credit cards or, at the very least, minimise your usage so that they don’t get out of hand again.
The best way you can start the process is by talking to your mortgage broker. If you have any doubts just list the phone and call me on 1300 133 193 to discuss your debt consolidation plans.
