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Debt consolidation for home owners

Sep 30, 2014 |

Most people applying for debt consolidation help are looking for a personal loan to consolidate their unsecured debts such as credit cards, store cards, other personal loans etc. However few take the time to consider that their cheapest debt consolidation solution may be to consolidate these debts into their home loan.

While debt consolidation into your mortgage will increase the size of your home loan it should reduce your monthly repayments thereby making your current debt level more affordable.

Having said this, debt consolidation into a home loan is not for everyone. First of all you must have sufficient equity in your property to qualify. That means that after you add your current home loan amount together with your unsecured debt amount the overall figure must be notably less than the value of your home. Some people do not understand that you can not consolidate debts into a new home loan with no equity.

 Example 1:

  Property Value :    $500,000
  Home Loan balance:    $350,000
  Other Debts :     $50,000

In this scenario your new mortgage would be $400,000 for a property worth $500,000 – that is an 80% loan and providing your income position is satisfactory, it can be done and should offer savings.

Example 2:

   Property Value :   $500,000
   Home Loan balance:   $450,000
  Other Debts :   $50,000

Here the current mortgage is already at 90%. A refinance beyond that would not be possible. To consolidate unsecured debts into the mortgage, a 100% home loan would be needed – this is not available.

There can be other reasons why debt consolidation into your mortgage may not be possible or cost effective. One such reason would be where your income level has dropped and you can no longer sustain the loans you are holding. even if you have equity in your home, loan affordability determines if this is possible.

Another reason may be that you have acquired defaults since taking out your home loan. Consequently your original home loan may be with a bank at a low rate, whereas debt consolidation will necessitate refinance to a specialist lender at a higher rate, making the new home loan more expensive rather than offering you a saving.

Nonetheless sometimes a mortgage at at a higher interest rate than you are paying today, may still offer the benefit of lower monthly repayments once other debts are consolidated.

Posted in: debt help, debt relief

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