Refinancing allows homeowners to stay on top of their finances in more ways than they might think. The end benefits generally outweigh the upfront costs, and now is the perfect time to consider refinancing as the Reserve Bank continues to hold on interest rates.
Here, we explain how refinancing your home may help you consolidate your personal debt into one manageable loan.
Why is consolidating debt a good idea?
According to Mozo, 52% of Australians in 2019 had credit card debt for at least six months, and some had up to ten years of debt.
Consolidating debt offers you greater control over your finances, as you may pay less interest and there are fewer bills. This means it is generally easier to forecast your finances and achieve your financial goals.
What you will need to consider before refinancing
1. The Costs
Refinancing can incur some initial costs, so the first thing you need to consider is if you are in a financial position to refinance. Refinancing generally costs 3%-6% of the principal loan, and homeowners can incur fees and charges from their previous loans, such as exit and government registration fees.
If you are consolidating your debt while refinancing you are probably also going to incur “discharge fees” for breaking the loan but don’t be put off. This is standard and you will be getting a better deal from the refinance.
2. Your Credit Score
If your refinance application does get rejected due to a low credit score and you still want to go ahead, you may need to liquidate some of your assets. This simply means selling them to rid yourself of some debt and increase your assets and credit score.
3. Your Home Equity
Generally, lenders will not provide a loan greater than 80% of your home’s value without lender’s mortgage insurance (LMI). When you refinance you can access untapped equity that you may have built up. This is particularly useful if you are consolidating debt so you can remodel or renovate your home. However, the pitfall is when you consolidate debt or refinance and the loan is greater than 80% of your equity, you will need to pay LMI again.
4. The Interest Rates
Read up on the current interest rates and what experts are predicting in the next few years. While they may not be exact, they can give you a good indication of financial trends in the Australian economy and property market. They can help you decide whether fixed or variable rates are better for your home loan. You can also keep an eye on interest rates by subscribing to our monthly newsletter.
Benefits of consolidating your debt
There are many benefits to consolidating your debt into a single home loan, such as:
Easier to Track Finances
With one single secure loan, you can track your finances and forecast savings. There is less financial stress because everything is due on the same day each month and overall you may be paying less interest.
Improved Credit Rating
Missing a payment of an unsecured debt can negatively impact your credit score which is why debt consolidation is a good idea. Over time you can improve your credit score as you only have one line of credit and you are making monthly repayments on it. Generally, even if you miss one repayment it doesn’t negatively affect your score as much as it would with unsecured debt.
How do I refinance and consolidate debt?
That’s the easy part. You switch lenders and move to one with more favourable terms. A new provider may have a better interest rate, redraw abilities or more flexible repayment terms.
At Melbourne Finance, we have years of experience helping individuals, couples and families refinance their homes to consolidate their debt. We get to know your situation and provide you with sound financial advice and lending options.
To book a confidential chat, fill out the contact us form.