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Are Your credit card bill’s getting out of control?

Marty McDonald - Thursday, January 18, 2018
Debt consolidation is the act of bringing many debts together into one new debt. This can be beneficial for helping you manage your repayments and have a clearer picture moving forward. If you have equity in your home this can be done by refinancing your mortgage to pay off current debts, shifting the debt into your home loan which usually has a much lower interest rate than unsecured loans and credit cards.

For people with snowballing debt from many sources, consolidation can help them reduce repayments and create a clear payment plan moving forward. 

Pros 

The key benefit of debt consolidation is that it may help to reduce the amount of interest you pay each month. The benefit of refinancing your home loan to consolidate debt is that home loan interest rates are generally lower than the interest on other forms of credit, especially unsecured credit like credit cards and personal loans.

Refinancing your home loan means all your debt repayments will be covered by the one mortgage repayment. If you pay extra on your new, refinanced home loan after consolidating your debts, you’ll pay off your debts sooner and save money on interest compared to the interest you might have paid – say on a credit card.

Cons 

If entered with the wrong mindset, debt consolidation can end up making a bad situation worse. For example, if you consolidate your credit card debt balances onto your home loan, but then don’t cut up and close the card accounts you can easily end up further and further in debt. Home loan lenders often have no easy way to close another banks credit card account so ultimately the responsibility to do so falls to the borrower. Even if your home loan lender advances the money direct to the card providers they often won’t actually close the account because they don’t have this authority with the other institution. 

Further, it’s important to remember you’re moving unsecured debt into a secured debt, using the asset of your home as the security. Hence ownership of your home is at stake if things get out of hand. You may also end up paying more money in interest over the 30-years, but for people who can’t meet their current monthly debt repayments that’s often a con they rightfully accept for the short term at least. 

It’s also important to be aware of home loan fee’s and refinancing costs to assess whether you really are saving money. This will depend on your level of debt and current interest rates.  


Mindset

Before debt consolidation, it’s important to seriously assess how you got in this situation to start with. If you have above normal debt, it’s likely that there are situational factors or poor money mindsets that will continue after you’ve refinanced your debt. Moving that debt on to your home should be a commitment to a new lifestyle of spending. If you just run up more credit card debt you won’t have any equity in your home as a safety net and may face bankruptcy or losing your house in the future. 

Some people who consolidate their debt benefit from ‘splitting’ their home loan. The debt remains under the same interest rate but has its own statements and accounts. That way you can accelerate the payment of that debt to save on interest. This also can help people not to forget about the debt and go back to old habits. 


Case Study of a recent client we assisted: 

A new client recently came to us with a situation that was to be frank, unsustainable. They had 10 different loan and multiple credit cards all at their limits and a few missed / late payments. Cash flow was getting desperate, and they were starting to fall further behind. They had a fair amount of equity in their home.Before refinance (actual repayments)

  • Existing Homeloans -- $489,000 at average 4.7% p.a. = $3,480 / month
  • Business loans -- $88,000 at average 12% p.a. = $3,000 / month
  • Credit cards -- $84,000 at average 15% p.a. = $2,520 / month minimum repayments
  • Total monthly payments = $9,000
  • After refinance (consolidate all loans into 1 + lender fees)
  • New home loan -- $668,00 @ 5.85% p.a.
  • Total monthly payments = $3,936
MONTHLY PAYMENT DIFFERENCE AFTER DEBT CONSOLIDATION = $5,064!!!!


About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on and LinkedIn.

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