How do I con­sol­i­date debt into my home loan

Money Magazine Australia - - COVER STORY -

$71,348! That’s the amount one cou­ple man­aged to rack up on more than eight credit cards. It’s one of the high­est per­sonal debts that I’ve ever had to help con­sol­i­date into a home loan.

While this case is still play­ing out, one thing I’ve learnt about con­sol­i­da­tion (ei­ther in my past role as a lend­ing man­ager or in the edi­tor’s seat) is that it may be the fastest and eas­i­est way to get back on track but it’s not al­ways sim­ple to achieve. It re­quires some se­ri­ous prepa­ra­tion.

“Banks have dif­fer­ent ser­vic­ing [in­come ver­sus out­go­ings] guide­lines for dif­fer­ent prod­ucts, so where some­one may be able to get a new credit card af­ter get­ting a home loan, that same per­son may not be able to get a new home loan of the same value if they have the credit card first,’’ says mort­gage bro­ker Michael Sal­iba, from Smart­line.

Rolling high-in­ter­est loans into one low-rate per­sonal or home loan may make sense to us but for the lender tak­ing on the risk it’s not al­ways the smartest move. That’s be­cause you’re ask­ing them to take on ex­tra debt – and risk –that prob­a­bly be­longs to a num­ber of lenders. You need to prove that both you and the po­ten­tial lender are bet­ter off by con­sol­i­dat­ing.

Some­times it pays to ap­proach the lender where you have the most debts. Then it at least has a vested in­ter­est in get­ting you back on track.

If you’ve got eq­uity in your home, most lenders will al­low you to bor­row up to 80% of its value. You’ve got a bet­ter chance of con­sol­i­dat­ing be­cause you can of­fer the lender some se­cu­rity.

But se­cu­rity is just one side of the equa­tion. You’ll also need to show that you can ser­vice the new debts.

If you do con­sol­i­date a per­sonal debt into a home loan, you’re turn­ing a short-term loan into long-term debt. This in it­self could cost you dearly if you don’t pay it off in the rec­om­mended per­sonal loan time frame, which is one to seven years.

Sal­iba says that when he helps clients con­sol­i­date he looks at keep­ing the same, or a sim­i­lar, loan term. That way the client isn’t pay­ing more in­ter­est over a longer pe­riod. “If the clients are will­ing to keep up the same monthly re­pay­ments as they were on the fa­cil­i­ties be­ing con­sol­i­dated di­rectly onto one larger home loan, then it makes sense to in­crease the to­tal loan amount and they will still pay out the trans­ferred debt sooner.”

If you have no eq­uity in your home or you don’t own one, then the chance of con­sol­i­dat­ing any more than, say, $20,000 in per­sonal debt is slim. Lenders sim­ply don’t want to over-ex­pose them­selves with un­se­cured loans.

Re­mem­ber that a re­jec­tion is only a tem­po­rary set­back. You should con­tinue to meet the min­i­mum re­pay­ment re­quire­ments where pos­si­ble. If you find it hard to meet your re­pay­ments be­cause of un­em­ploy­ment, ill­ness or a change in fi­nan­cial cir­cum­stances, you can ap­ply to your lender for a “hard­ship vari­a­tion”, which changes the terms of your loan. It’s also worth seek­ing ex­pert help from, for ex­am­ple, the Na­tional Debt Helpline (1800 007 007).

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