When you refinance your loan to consolidate debt, it’s usually to save money. You may be paying off a personal loan, car loan and multiple credit cards on top of your home loan – and paying different rates of interest on all of them. (Credit card debt could be between 9.99% p.a. and 21.99% p.a., for example.)
Consolidating all your debts into your home loan allows you to pay off everything at once under the one interest rate. Think of it as KonMari for your loans. Does that credit card really bring me joy? Does that car loan actually deserve its own place on the kitchen bench or can it be moved into a cupboard with all the other loans?
Consolidating your debt also helps you keep track of payments, ensuring you don’t accrue fees for missed payments or further damage your credit profile.
While consolidating debt is a more affordable option of paying off multiple loans for many people – and can improve cash flow – it does, however, mean you’ll be paying interest on the combined balance for a longer period of time (the length of the loan). It could also mean that you pay more total interest over time, so you should consider whether it is right for you and how you will be managing your finances. It’s important to make additional repayments to pay off the enlarged loan sooner – or pay off a big chunk whenever you can.
Consolidating debt into your home loan enables you to pay off everything at once under the one interest rate. You can consolidate all sorts of debt into your home loan: credit card debt, car loan debt, personal loan debt, that debt you’ve owed your parents since 1996 (okay, not that last one). Pulling credit card debt into a home loan allows you to enjoy the lower interest rate that most home loans offer compared to other forms of credit. (Credit card debt could be between 9.99% p.a. and 21.99% p.a., for example.) It does, however, mean paying interest on the combined balance for a longer period of time (the length of the home loan), and possibly paying more total interest, so it’s important to make additional repayments to pay off the enlarged loan sooner – or pay off a big chunk when you can. Chat to UNO about your options.
Consolidating your debts can be good for your credit score. This is because, to credit agencies, it appears you are paying off several debt accounts, keeping you in the black.
Generally you’ll want the overall Loan to Value Ratio of your new loan to be under 80% so you can avoid paying Lenders Mortgage Insurance (LMI) – the insurance lenders take out to protect themselves against the borrower defaulting on the loan.
To consolidate your debts, you’ll need: