How do I consolidate debt into my home loan
$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).