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If you’re struggling with high interest rate personal or car loans, or credit card repayments, and have equity in your home or investment property, you might want to consider a home loan, or mortgage refinance.
Refinancing is the process of taking out a new mortgage to replace an existing loan.
While this can be with the same lender, it often involves switching to another bank. Home loan refinancing is an alternative to more traditional debt consolidation. It enables you to make your short-term debts easier to manage by consolidating unsecured credit cards and personal loan debts into your home loan when you refinance. In this way, you consolidate all your currently monthly debts into a single mortgage repayment.
A home loan usually has substantially lower interest rates than credit cards or personal loans, and when you refinance you might also be able to secure an even better home loan interest rate at the same time. You might also get access to additional features such as an offset account, making managing your overall finances easier.
Home loan refinancing enables you to make your short-term debts easier to manage by consolidating credit cards and personal loan debts into your home loan.
What’s equity?
If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity in your property. Quite simply, equity is the difference between the current value of your property and the outstanding debt on your home loan.
For example, if Richard’s home is worth $400,000, and the current amount he owes the bank for his debt on his home loan is $250,000, then he has $150,000 worth of equity in his house. Before Richard gets too excited though, the bank will only let him use some of that equity.
While how much equity you can use will vary between lenders, if Richard was to use it to buy an investment property, in most instances he could only borrow up to 80% of the value of the home.
With this in mind, here’s how Richard can calculate his usable equity:
- Work out 80% of the value of Richard’s home: $400,000 x 80% = $320,000
- Take the 80% value of Richard’s home and subtract his current outstanding debt: $320,000 – $250,000 = $70,000.
This means Richard has $70,000 worth of usable equity to put towards a deposit and other associated costs for an investment property. The amount of equity that the bank would allow Richard to use to consolidate credit cards and/or personal loans will differ between lenders and will depend on a number of factors including his credit history, income and expenses.
What are the benefits of refinancing my home loan to consolidate debt?
A home loan refinance is a secured debt consolidation, secured debt consolidation loans are when you secure the loan with an asset, such as your home. They are usually easier to apply for than an unsecured debt consolidation loan.
More benefits include:
✓ Budgeting made easier – because there’s only one loan, setting up a repayment plan is easy – you’ll have a single fixed time frame of when you’ll be debt free allowing you to budget more easily and start saving.
✓ One set of fees and charges – often loans come with annual administration fees and charges. Having just the one loan means you can reduce the overall amount of administration fees and charges you need to pay.
✓ Reduce the overall amount of what you owe Your home loan should have a lower interest rate than your other loans and you have only one annual fee, reducing the overall amount of what you owe.
✓ No more missed payments – unlike before when you had several bills to pay with different due dates, now all you have is one payment each month, making it far easier to manage and much harder to forget.
✓ Fix Bad Credit – The initial enquiry to get your new debt consolidation home loan may initially hurt your credit score. However, paying off all your other debts and continuing to make your repayments on your new refinanced home loan on time and in full, demonstrates good repayment habits and will improve your credit score over time.
✓ No more annoying calls from creditors – lenders enlist the help of debt collectors to help collect payments from people who haven’t been paying up or who have a history of paying late. When you consolidate your debts into a refinanced home loan, expect any calls from creditors to stop. single fixed time frame of when you’ll be debt free allowing you to budget more easily and start saving.
Things to consider when refinancing your home loan:
There are costs involved with refinancing your home loan.
✓ You’ll be paying potentially small, short-term debts off over a longer term, maybe up to 25 or 30 years. While home loans generally have lower interest rates, the total amount of interest you pay over the 25 – 30-year period may end up being higher.
✓ There will usually be upfront and ongoing costs associated with exiting your current home loan and switching to the new loan. These may include a settlement fee, loan establishment fee, mortgage registration fee, loan service, and/or exit fees and charges, so it’s important that you secure a lower interest rate when you consolidate to offset these costs.
✓ Government duties and taxes may apply.
What are the alternatives to a home loan refinance?
If you don’t own a property, don’t have enough equity available in your property or are unable to arrange mortgage refinance for debt consolidation, there are other debt solution options available. These debt solution options might include:
✓ Debt settlement
✓ Debt consolidation
✓ An informal agreement
✓ A formal agreement.
✓ A combination of these and other solutions.
For more information on whether home loan refinance might be an option for you, call one of Fix Bad Credit’s debt experts on 1300 406 172. Our debt experts can help you assess your financial situation for free and identify debt solution options tailored for your specific personal financial circumstances, including whether home loan refinance is right for you, using their in-depth knowledge of credit law and debt processes.
Debt is one of the few stressors in life that doesn’t go away. The worry is always there, along with the feeling that there is nothing that can be done about it. Money and debt worries cause heavy emotional and mental burdens, affecting your health, your work and your relationships. But just know you’re not alone. If you’re feeling overwhelmed by money matters, at Fix Bad Credit we’re here to help you find relief from your debt stress.
Talking about debt can be daunting. It’s hard to know where to start or what your options are. However, you can take a small step right now by picking up the phone.
Case Study:
Richard, who we met earlier in the piece finds himself with the following scenario:
✓ Mortgage $250,000 @ 3.75%pa interest only over 12 months is $9,375.00 per year
✓ Credit Card $15,000 @ 8.99%pa interest only over 12 months is $1,348.50 per year
✓ Car Loan $27,500 @ 7.99%pa interest only over 12 months is $2,197.25 per year
✓ Personal Loan $5000 @ 7.99% interest only over 12 months is $399.50 per year
Each Month Richard pays $1,110.02 in interest totalling $13,320.25 a year.
Richard makes the decision to refinance, taking $50,000 from his equity to service his debts.
Mortgage $300,000 @ 2.25% interest over 12 months is $6,750 per year.
Each Month Richard now pays $562.50 Richard is now paying $537.52 a month less or $6,570.25 less a year.
