Consolidating debt

Consolidate your high interest personal loan or credit card debt into a low interest “home” loan.

Does it make sense to consolidate debt?

If you’ve got personal debt such as a car loan, personal loan, or credit cards and you’re finding it hard to keep up, it can help with cash-flow to consolidate into a low interest home loan*.

The good thing about consolidating your loans is that you get a chance to lower your monthly payments and save interest. You can structure the loan so that your monthly payments are affordable by spreading them over a longer term so it’s easier to keep up. You can opt to “split” the new borrowings so that it’s not lumped on top of your 30-year mortgage, effectively then you will have 2 loans secured to you home. 1. the original home loan and 2. the new “consolidation” loan. By doing it this way, you will be able to select the term (possibly 5-10 years, instead of 30) and you can focus on paying your “consolidation” loan back as quickly as you can.

The other option is to increase your original home loan to cover the personal debt in its entirety. At MTM, we would only recommend this if absolutely necessary. In doing this, your initial repayments will be less, however if you spread your personal debt over a 30 year term you will end up paying much more interest in the long term and could add years to your mortgage. We think the best option is to keep the “consolidation” loan separate from your original mortgage. That said, this would be the perfect question to ask you financial adviser. If you don’t have one, talk to us ~ we know (and use personally) a range of reputable financial advisers and can introduce you for a no-obligation chat about your personal circumstances.

*To consolidate debt, you must have an appropriate level of equity available in your property, and must also be able to prove serviceability to the new lender. Speak to MTM to see if you have sufficient equity and serviceability to make it happen.

What are the disadvantages to consolidating debt?

Even though consolidating all of your existing credit commitments into a single monthly repayment might sound like a good idea, you must be aware of the potential disadvantages:

  • Expense – Some debt consolidation lenders charge fees. Make sure the new loan isn’t going to cost you more than it saves.
  • Savings – After all fees and expenses are accounted for, you need to determine if it will save you money over the long run.
  • Amortisation – Your new loan will have a different amortisation schedule so check in with MTM or your financial advisor to see how long it will take to pay off your debt. If you extend the loan term then the lower payment may end up cost more in interest in the long run.
  • Penalties – Are you going to pay penalties and charges for closing your existing loans?
  • Band-Aide vs. Solution – Have you solved the overspending problems that caused the debt in the first place so that you don’t get yourself into more debt?

You may want to keep your existing loans, even if the payments are higher. Remember that in some cases you may actually pay more in interest over time with your new debt consolidation loan.

Steps To Consolidate Your Debt

Step 1 – Gather Your Debt Details

Before you consolidate, you need to know the following for each credit type:

  • Balance (what’s owing)
  • Payment
  • Interest Rate
  • Annual Fees
  • Early repayment penalties

Step 2 – Explore Your Options

Now that you know how much debt you’re facing, it’s time to look at your options for consolidating your debt.

  • Check to see if you are eligible for low credit card balance transfer rates. If you don’t know what this means, or where to start please come and talk to the team at MTM as we would be happy to give you some guidance here and potentially introduce you to bankers that could help.
  • Look into the “snowball” method of paying back your loans. You can accelerate your debt payoff by using the “rollover” method. As soon as the first debt is paid off use the freed-up payment amount to pay down the next debt even faster. Continue the process (building like a snowball) until all debts are paid off. The debt snowball method is the most cost effective, fastest, and emotionally satisfying way to get out of debt.

Step 3 – Apply For Debt Consolidation

Contact MTM to see if you are eligible to apply for a consolidation loan. Your application processing may take 1-2 months so make sure you budget sufficient time.

Step 4 – Stick To Your Commitment

Get out of debt by changing your habits. You need to commit to your planned solution and stick to it. You should keep up with your payments so you will be able to pay off your loan. The trick is to pay as much as you can afford each month so you will get out of debt sooner.