Using your home to consolidate debts

Anyone considering mortgage refinance or a new home loan in order to consolidate other debts into the home loan needs to keep the following in mind:

Lower repayments does not mean debts will cost less

In consolidating other debts into your mortgage there is almost certainly going to be a reduction to your overall monthly repayments. This occurs for 2 reasons, firstly a home loan spreads the outstanding debt over a very long time such as 20 or 30 years. Secondly the interest rate that you will be charged on your home loan will almost certainly be lower than the rate that is charged on any other form of credit. However if you simply stick to set repayments then you will be paying interest on your consolidated debts for up to 30 years and these debts will over that time cost you significantly more than a shorter term loan with higher periodic repayments.

Available equity is not a guarantee of loan approval

Just because you have equity in your property that is not a guarantee that you will be able to qualify for a consolidation loan which allows you to access that equity. Lenders will want to see evidence of your income and loan affordability. If you are a pensioner with $100,000 mortgage against a home that is worth $1,000,000, there is a good chance that your loan application will be declined despite oodles of equity.

Lenders are required to ensure that a loan they offer to you is one which you can afford on your income. It is not acceptable to say, you can sell my house if I stop paying. Courts can help you set aside any loan which you can prove should not have been given to you because you can not afford it.

Bad credit borrowers may not benefit

If your credit history has suffered since you took out your home loan originally, you may find that you will be worse off if you refinance your current bank home loan to a more expensive bad credit home loan simply to allow yourself to consolidate these other debts. If your mortgage is $350,000 and you are paying 5.9% with a bank, you may find that your new non-conforming loan is costing you 7.50% and it is not worth proceeding with this refinance simply to save interest on $20,000 of unsecured debts.

Can’t consolidate with a property purchase

This is a common request from home buyers. People do not seem to understand the concept of secured lending. The reason that home loans are so much cheaper than any other form of finance is that the loans offered are secured and are lower than the market value of the security property. When you are making a home purchase, the most you are able to borrow is 95% of the purchase price. To qualify for a 95% home loan you must be able to present the lender with full financials and a clean credit history.

If you have another $20,000 in debt that you need to consolidate, your overall mortgage can still not exceed 95% of the purchase price. Given that most home buyers have limited deposit and wish to borrow as much as possible for their home loans, there is usually no scope for building debt consolidation in as part of the property purchase.

Once you have been in your home for some time, your property value has increased and your mortgage somewhat paid down, then consolidation may be possible.