Debts into home loan – how to ?

Oct 12, 2014 |

When it comes to debt consolidation most borrowers tend to think of a low rate unsecured personal loan to absorb other high interest debts such as credit card balances, other small loans or outstanding bills and debts.

However more and more borrowers are discovering the benefits of consolidating high cost debt into their mortgages. After all home loans tend to offer the cheapest form of finance to cash strapped borrowers.

However not every home loan transaction will qualify for this kind of debt consolidation.

Purchase of a new home

Borrowers often contact us asking is they can consolidate existing debts into a new home purchase. The problem tends to be lack of equity in the new property especially for young home buyers. Most first home buyers are trying to borrow the maximum that they will be able to qualify for in order to afford a home purchase. Quite often this means a loan of 90% or even 95% – this leaves no equity for additional debt consolidation. After all no lender will allow a loan of 100% or even more.

However home buyers who are purchasing their second or third property with a lower loan to value ratio may well be able to consolidate as part of a property purchase. Ability to do so depends largely or loan affo0rdability and available equity.

Refinance current home

Borrowers who do not have up-to-date financials or those who have significant equity in their property may be able to refinance their current mortgage and borrow a little more to consolidate other debts. For example where your home is worth $500,000 and current mortgage is $200,000, borrowing a little more for debt consolidation should be reasonably easy. However if your home mortgage is already $450,000 – it is very unlikely.

Is loan affordability the only criteria?

loan affordability is clearly not the only criteria used by lenders to assess your application for mortgage refinance or property debt consolidation. While a strong income is important, just as important is having sufficient equity. After all the reason that home loans are cheaper than personal loans is that they offer the lender security.

There is insufficient security where you need to borrow most of the property value. Maximum mortgage refinance for debt consolidation is likely to be at 90% of the property value. However this would only be available to borrowers with a perfect credit history and full financials.

If you have no financials or some credit history hick-ups after debt consolidation your mortgage needs to be below 80%.

High income low equity

Borrowers with a strong income but insufficient property equity will not qualify for this form of refinance. It does not matter if you are earning $100,000 or $1 million per year. However borrowers on a high income can consider a personal loan for debt consolidation or a balance rollover credit card to help them clean card debt.

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