In times of increasing Interest Rates and with no clear stability on the horizon, a lot of people are looking at ways they can tidy up their debts, and consolidating them into their home loan is a very popular way of doing this, but beware as this can lead to greater debt and if refinanced into the wrong loan product can often end up costing you more!

make good decisions when it comes to debt consolidation!

Look Closely at your Current Situation!

It’s a stressful time at the moment and nobody really knows for certain what will happen in the short term with regards to interest rates! It’s a time where we need to tighten the strings and prepare for worst case scenario! I’ve been looking over my finances and looking for ways to cut costs and everybody needs to keep abreast of how they can do the same and consolidation can be a good way to ease some of the pressure…but with caution!! The problem with consolidating debt into a home loan is that often that personal debt ie. credit cards, personal loans etc.. rear their ugly heads again once the consolidation is completed!!

Debt Consolidation Adds to your Home Loan Balance

Someone who wants an extra $20k to pay out their credit card, increases their home loan by $20k to do this, but the question is “does this person actually then cut up and cancel their credit card after settlement?” If not, then they have just increased their overall debt by $20k without saving themselves anything! My previous job as a Lending Manager I oversaw hundreds of applications for refinancing & debt consolidation, sure there are settlement conditions for these debts to be repaid but with debt consolidation it’s usually up to the individual applicants to do this. The Banks won’t actually control the funding and will just treat it as an equity release. It is essential that if you are considering eating into equity in your property that you don’t get a new credit card after settlement and fall into the same habits!

Debt Consolidation Reduces your Equity!

95% of the time I found that a refinance also had a debt consolidation associated with it, and if spending habits don’t change after refinancing and more personal debt incurred then the home loan can balloon out of control! In the above example, $20k has been added to the home loan, which has effectively reduced the equity in the property! And then what happens if the home value decreases?

Consider all the Options!

Debt consolidation can be an effective way to tidy up debts, but only if refinanced into a lower interest rate and spending habits become more disciplined! As I’ve stated before in previous posts, I believe it’s best to pay off your mortgage the fastest way possible, and by consolidating you are adding to your home loan…so there are both pros and cons when it comes to debt consolidation!!