Debt consolidation: what’s involved and why it’s a sensible option for some
Life is unpredictable (even without a global pandemic!). Unexpected life events like injury or divorce always seem to strike at the worst times, and the rising cost of living can sometimes feel overwhelming.
As the pressure of financial stress mounts, so do your repayments from multiple personal loans and credit cards. It’s at this point, when they start to become unmanageable, that it’s time to take action.
If you own your home or an investment property, you might be able to use it to your advantage by moving all your debts into one payment, also known as debt consolidation. This could help you shave a good chunk off your monthly outgoings, giving you some much needed cash flow to get back on track.
Here’s how it works:
Refinance your home loan for debt consolidation
When you use your home loan to consolidate debt, you pay off your credit cards, personal loans and other debts, by bundling them into your home loan. That means that the money you owe on your home increases, while your other debts are paid off.
Access lower interest rates
Because your home loan is a secured debt (credit cards and personal loans are unsecured), lenders are generally willing to offer a much lower interest rate. A lower interest rate is likely to significantly reduce your monthly repayments.
Get one monthly repayment
Keeping on top of multiple monthly repayments can be hard to manage. Debt consolidation allows you to move all your debts into one loan with one repayment that is easier to manage, so you can concentrate on getting that debt down as quickly as possible. This is especially helpful when your financial difficulties are temporary – like after a divorce or separation.
Reduce your monthly repayments
Consolidating debts will extend the term of your home loan, but it might still be the smartest option. If you’ve been paying off high-interest debt like a credit card, it’s likely your monthly repayments will drop, and you could still save money in the long run.
Things to consider before consolidating debt
Like any financial move, there are some risks involved with refinancing to consolidate debt. The most common misconception is that a lower interest rate means you’ll pay less interest over the full term of your loan, but this isn’t necessarily true. It all depends on how quickly you’re able to pay off the debt. Here are some things to think about:
- Is the new interest rate higher than what you’re already paying?
- Are there any high break fees involved that would cancel out any savings?
- Will your monthly repayments decrease?
- Can you consolidate all your debts if you have multiple (rather than just one)?
- Are there costs involved with transferring debt to your home loan?
When done right, refinancing your home loan to consolidate debt can save you money, reduce your monthly repayments, and help you get your debt paid off faster.
Is debt consolidation the right option for you?
If you’re already struggling to make repayments on your existing debts, you run the risk of falling even further behind when things get tough. Using your home loan to consolidate debt isn’t for everyone, but to find out if it’s a good option for you:
- Put all your debts on the table. Go through each of your debts, write down the total amount, interest rate, current repayments, and the time it will take you to pay it all off.
- Assess your monthly income and expenses. See if there’s anywhere you can cut back or free up extra funds. Determine how much you need to reduce your monthly debt repayments to get your head back above water.
- Use an online calculator. Now’s the time to figure out what your best option is. Try our home loan repayment calculator to figure out how adding to your mortgage balance will change your monthly repayments.
- Speak to a financial advisor. If you are unsure, seek professional advice before making any decisions.
Less debt, less stress
Out of control debt can feel like a grey cloud constantly hanging over your head. Problem is, sometimes life can get in the way, and it can feel like you’re constantly taking one step forward – then three steps back. Using your home loan for debt consolidation might provide you with a way to financial freedom.
If you think debt consolidation is right for you, Bluestone might be able to help. We offer more flexibility than many other lenders – for example, we can consolidate tax debts and debts from private lenders. We also have generous debt consolidation limits – you can consolidate up to $100,000 of unsecured debt and still qualify for our best available rates, and we also have loan options that offer unlimited debt consolidation, if you need a bit more flexibility.