Debt Consolidation Loan

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Debt consolidation

Your mortgage is pretty much the biggest debt you will ever have and it is more than likely the cheapest money you will ever rent. That is an important fact when it comes to the important decisions about the overall management of your debt.

Many home loan packages will now allow you to offset your credit card, pay in your salary direct and generally manipulate your debt to minimise the interest you pay. Before signing up for your mortgage, take a look at your entire financial position and take advantage of any opportunity to consolidate debt, minimise interest and potentially even get rid of paperwork by minimising the amount of lenders or loans you have to deal with each month.

Debt consolidation – how does it work?

As noted, consolidating your debts into one manageable loan can be a smart way to not only get your finances in order, and save money, but to also reduce the amount of personal finance paperwork you deal with on a monthly basis. You might have personal loans, car loans, credit cards and a mortgage. Usually these debts can be consolidated against your mortgage and of course work harder under your lower mortgage rate. Debt consolidation, however, does take a degree of discipline and finance management and while in the end, you are usually better off to consolidate your debts, but it is important to bear in mind the following:

Pros

Cons

Reduced interest rates. If you are consolidating debt against a mortgage, you are using secured debt. Because you have security, your interest rate will typically be lower
If all your loans are secured against your mortgage, you will typically not only be paying lower interest, but the loan period will be longer. This gives you lower monthly payments
With all loans secured against one debt, you have only one creditor. Fees should be lower across the board and paperwork less

The way that your mortgage offers a lower interest rate is by you putting up your property as security. If you don’t make your repayments, you may lose your property.
It can be easy to get into further debt if you don’t manage your situation carefully. If you have consolidated your debts under a mortgage, set yourself a payment level each month and make sure you stick to a budget
Don’t get more credit cards!
By consolidating loans into one secured home loan, without making extra repayments, it can easily take a longer time to pay off your debt

Bank/lender fees to watch out for

In most cases, debt consolidation is a very straightforward process and may well cost you nothing as you integrate debt into equity. Sometimes however it might involve a complete refinance. (Read our section on Refinancing). Costs to change could be minimal under a number of circumstances, especially if the new loan is with the same lender and the amount is the same, with minimal structural changes. If you are thinking of refinancing to achieve your debt consolidation, read about the costs involved at Refinancing – What are the Costs of Changing from one loan to another?

Assess your situation confidentially with a professional

If you are concerned or not sure, the first thing to do is assess your options thoroughly with someone who understands your situation. Talk to your accountant, then talk to your local mortgage broker. A good mortgage broker will have loans assessment software and they will be able to use their technology to do the sums for you.