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Mortgages and Debt Consolidation on the low down

If you're thinking about changing home loans to save money then read this article to get the low down on everything you need to know before switching.

21 February 2022Lloyd Smith 5 min read
How to remortgage your home loan, refinance your mortgage, consolidate debt
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Looking to get on top of your debt? In the right circumstances, consolidating your debt into your mortgage can be a good way to streamline your monthly repayments, pay less interest and make managing your finances simpler. Learn more about what debt consolidation is, the processes involved in refinancing your mortgage and everything you need to about rolling your debts into your home loan.

Debt consolidation is a process that allows you to combine multiple debts into a single loan. People may choose to consolidate their debts for many different reasons, with some of the most common including:

  • To save money
  • To make managing their finances easier Paying off several different debts at one time means that you’re also likely to be paying interest on each. Consolidating your debts into your home loan may be a better option, with this type of loan often attracting lower interest rates than most credit cards, personal loans and other common forms of credit. Paying fewer account keeping fees, monthly fees and other charges may also help you save some extra money.

Instead of having to manage multiple due dates each month, deal with several different lenders and keep tabs on many separate debt balances, combining your debts into one loan may also help to make managing your finances simpler.

Consolidate your debt

There are a few key steps involved in consolidating your debts. Before you’re able to enjoy lower interest rates and the convenience of a single repayment, you’ll need to:

  1. Take stock of your current debts. By reviewing the current state of your debts, including the total amount that you owe, how much interest you’re being charged, monthly fees and any other applicable expenses, you’ll get a clearer picture of where you stand financially.
  2. Determine what you can afford to pay each month. Analysing your current income and regular expenses can help you understand what you can afford to pay each month. If your repayments are too expensive, you’ll find it hard to stay on top of your debts.
  3. Weigh up your options. Once you understand your current financial situation, you may find it easier to compare the different options available to you.

It’s important to keep an eye out for the following if debt consolidation is an option that appeals to you:

  • More expensive repayments. Debt consolidation aims to make it easier for you to manage your repayments, so your new repayments ideally shouldn’t be more expensive.
  • Additional fees and charges. From exit fees to application fees, there may be extra fees and charges that accompany the debt consolidation process.
  • Longer loan terms. Depending on how large your other debts are, you may find that it will take longer than originally planned to pay off your home loan.

Refinancing your mortgage

There are many different ways that you can consolidate your debts, from taking out a personal loan to transferring the balance of your credit card. If you already have a home loan, refinancing your mortgage and consolidating debt into your home loan could be another option to consider.

Refinancing your mortgage involves taking out a new loan with your current lender or with another lender of your choice. In doing so, you may be able to roll several debts into one loan repayment, potentially paying less interest each month and incurring fewer fees.

If you’re thinking about refinancing your mortgage, the best place to start is to discuss your financial situation and future goals with your current lender. They may be able to offer you a better interest rate, reduce your monthly fees or recommend another type of loan that will better suit your needs. If your current lender isn’t able to provide you with a refinancing option that aligns with your goals, you‘re also able to consult other lenders to find more attractive loan terms and interest rates.

Choosing to refinance your mortgage with a new lender will see you go through the loan application process once again, but the new lender will typically liaise with your old lender to transfer your mortgage and tie up any loose ends.

Refinancing your mortgage does often involve upfront fees and charges. Before you settle on a lender or a financial product, it’s important to consider these expenses. While you may be saving money on interest and monthly fees in the long term, you could encounter additional costs in the meantime.

Consolidating debt into a first time mortgage may be possible, but there are some important factors to consider. Lenders don’t typically lend amounts greater than the value of the home, which means that you will need to save a larger deposit to cover your debts. Some lenders may allow you to consolidate your debts into your home loan if you make use of a guarantor, but it may be difficult to convince a friend or family member to act as one.

For those with established mortgages, your ability to consolidate your debts into your mortgage is generally based on the amount of equity that you’ve built over time. First time mortgages do not have any equity attached to them, which may make it more difficult to roll your debts into your home loan.

While the responsible use of credit cards may help to improve your credit score over time, sometimes the popular form of credit can negatively affect your chances of achieving a successful home loan application.

A higher credit card limit can indicate that you may be a liability in the future, especially when an average monthly minimum repayment is calculated based on the upper limit. The higher the repayment required, the harder it may be for you to meet your other financial obligations. Using several credit cards at one time may not be viewed favourably either, with risk increasing for the lender with each additional card.

Yes, it is possible to consolidate your debt before applying for a mortgage. Some people choose to consolidate their debt before they start house hunting to put themselves in better standing for their eventual home loan application. Consolidating your debts one or two years prior to submitting your application allows you to pay more of your balance off before you apply, showing lenders that you can successfully manage regular repayments and financial responsibilities. Waiting before you start applying for a home loan also gives your credit score some extra time to improve.

Although refinancing your mortgage may help you find a better interest rate and allow you to enjoy lower monthly fees, the process of refinancing could potentially affect your credit score.

During the process of applying to refinance your home loan, most lenders will check your credit history and credit score to gain a better understanding of your financial history and current financial situation. Each time a lender checks your credit history and score, however, an inquiry is recorded, which may see your credit score lowered for a period of time. Although the application process can have a short term effect on your credit score, most people are able to rebuild their credit score as they continue to pay off their new loan.

If you’re considering refinancing your mortgage, you’ll likely want to compare the options available from a variety of lenders. Although it’s generally good to shop around before you make a big financial decision, submitting several different applications in a short amount of time could be detrimental to your credit score, especially if they aren’t approved.

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Written by Lloyd Smith

General Manager AU

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