When you want to buy a home people have all kinds of advice for you. Some of it is great, but some should probably be disregarded.
So what about debt consolidation?
Does it fall in the good advice category or the disregard one?
Debt Consolidation definitely falls in the good advice category. There are many benefits to it, but it is not without risk. And should you consider extending your home loan to consolidate your debt?
Let’s look into all of these points now.
The Benefits Of Debt Consolidation
Often when you have the stress of multiple debt payments coming out, it can be overwhelming. The frequency of the payments can make it tricky to manage your cash flow. Especially if you have different payments coming out at different times in the month.
The solution to minimise the stress and make it easier to meet your commitments is to bring all of those multiple repayments into one consolidated payment. When you only have one payment date to keep track of, then it is far easier to manage.
You can also gain a clear picture of your finances and what money you have to work with. That way, you can increase your repayments to clear the consolidated debt sooner if you have spare funds available.
The other benefit of debt consolidation is when you are looking to apply for a home loan. The banks will be interested in your external debt, as they want to measure your affordability. That means they want to check if you have the cash flow available to afford your loan payments.
By consolidating your debt, often you will reduce the amount you are required to pay each month. Therefore, you will be reducing your minimum monthly outgoings. This will leave you with a surplus of funds to provide better affordability in your mortgage application.
By having more cash in your accounts, the banks are more likely to consider lending you the money you need to buy a home. There have even been instances where people would have been declined in their current debt position. But after choosing debt consolidation the banks will now approve their mortgage or allow them increased purchasing power.
The Risks Of Debt Consolidation
There are a couple of risks to consider when it comes to debt consolidation. The first is the interest rate on your consolidation loan. On occasion, lenders may stipulate a higher interest rate for debt consolidation.
The immediate gain is that you will have lowered your monthly outgoings. But, if you have extended the term of the loan to do so, you will have increased the total amount you will pay for the life of the loan.
Depending on the provider, interest rates could vary between 8.9% and 23.9%. Therefore, it is best to do some due diligence on who you choose to put your loan with. A Financial Adviser, like one of the expert team at Mortage Link can help you through this process. They can provide a selection of lenders to ensure that you avoid a bad deal and that debt consolidation will meet your goals.
Aside from higher interest rates, there is also the danger that you could fall back into bad habits. Often people who improve their position with debt consolidation find themselves with extra cash in their pocket each month. So, they fall into the debt trap - they take another loan.
That is clearly a bad decision as it would put you back in the same position you were in before you consolidated. If you do find yourself with extra cash, the better decision is to increase the rate of repayment so that you can get rid of all your debt faster. Alternatively, start a savings account to put the extra funds into. This will stop you falling into the same debt cycle.
Should You Extend Your Home Loan For Debt Consolidation?
Extending your home loan to consolidate your debt can work if you do it right. However, if you take a consolidation loan for the full term of your mortgage, you would increase the amount of interest you’d pay in the long term.
The better option is to limit the loan to a fixed period - 5 years is good if it works for your situation. The consideration has to be the total amount you could end up paying in the long run.
What Are Your Options?
There are many reasons that we choose to take on short term debt. But it can truly weigh on you if you feel like you are drowning in repayments. You feel like you are stuck and don’t know what to do about it.
The great news is that there are providers that can help you out of this position. Once you have a workable solution that is not crippling your finances it is easier to feel more comfortable about the situation.
The team at Mortgage Link can help you find that solution. We have a vast network of Advisers who want to find the solution for you. With access to every major lender in the country, we can find a debt consolidation loan that will work for you.
Get in touch with us today to ditch the overwhelm and start feeling like you are in control of your finances.