Consolidating your debts into one loan

Debt Consolidation

For many reasons we see borrowers consolidating their different loans and debts into their home loan, particularly in times of high interest rates and difficult economic times. Debt consolidation usually appears something like this:

1. The mortgage Loan to Valuation Ratio is at a reasonable level, say 70%. This means that the debt is equivalent to 70% of the value of the security property (the home.)
2. The borrower has a 7%, 25 year home loan of $250,000 with repayments of $1767 per month.
3. There are other outstanding loans, say a car loan, 3 credit cards and a few  outstanding bills to pay with scheduled repayments of $717 per month.
4. The borrower has been out of work recently or his income is less than it previously was and he is struggling to keep up.
5. He is currently repaying $2484 per month.
6. By consolidating his cards and car loan into the home loan over 25 years he will have a higher home loan at $277,000 but will reduce the total payments to $1957 per month, putting $527 per month back into his pocket. The new LVR on his loan is 77% and acceptable to the lender. He was also able to demonstrate that he can meet the reduced repayments on his current income because debt consolidation has reduced his total payments.

The borrower in this case benefits from debt consolidation by having lower repayments in the future and a lower interest rate on the old card and car loan debts. The downside to this is that these debts will now be repayable over 25 years so he should make a real effort to repay some of this debt in the short term. In this case, the borrower was fortunate that his LVR remained under 80%. Had it exceeded 80% then he would have been obliged to pay mortgage insurance, an expensive exercise. The higher the LVR is, the more difficult it is to do a debt consolidation.

It is now important to be disciplined in spending habits and to avoid taking out new credit cards etc. so that the same problem does not re-appear.

If you would like to discuss debt consolidation into your home loan or a personal loan, or chat about the likelihood and cost of doing this, please give Iden Money a call on 1300 334 336 or send us an enquiry.