debt consolidation

One of the things that can make your general finances harder is a high-interest rate credit card or a loan. The good news is that if you own a house, you can as well make an advantage out of your home’s equity. A way to do so is to combine your money into what is called a debt consolidation mortgage (as well as known as conventional mortgage,) home equity, or a line of credit.

What’s debt consolidation?

Debt consolidation is debt financing that unites 2 or more loans into one. It is a long-term loan that provides you with the funds to pay off several debts simultaneously. The good thing is that, once your other debts are paid off, it leaves you with just one loan to pay, rather than several.

How can I consolidate debt onto my mortgage?

There are basically two main options for consolidating your mortgage:

1 Remortgaging entire debt over to a new lender

Let’s take an example if you have a mortgage of $150, and another debt of $50 you can take a new mortgage with a new lender for $200. Typically, this is the best option in cases when you want to lower your monthly payments, or in general, pay less, considering the available interest rate of mortgages. This is of course not the case when you have a debt with 0%. At the end of the day, it is more up to your adviser to structure everything for you and to make sure that you are getting the best deal of all. 

Pros:

  • The rates are usually better than the rates you would pay on standard loans/credit cards etc.
  • It is easier to budget, only one payment to worry about each month.
  • You can normally borrow up to a higher amount, and release a higher percentage of equity.

Cons: 

  • You have to take into account that although it can save you money every month, at the same time when you already have a very good rate on your mortgage, this can lead to a higher amount of payback on your current mortgage.

2 Taking out a new loan and securing it on your current mortgage

You can consider effectively having 2 mortgages on the same property. Those second mortgages are not regulated in the same way as main mortgages, that’s why your lender has more freedom over what they can do in terms of them. This gives them an option to offer a self-cert loan, where a person proclaims their own income without the same level of proof required. This can be an ideal option to consider for self-employed. 

Pros:

  • God option if you are struggling to prove your income (e.g. you are self-employed)
  • Sometimes it is a more workable option for people with a poor credit rating
  • If you want to keep your current mortgage, this won’t affect it.

Cons:

  • Unlike option one, in this option, you will end up eventually paying more per month as the rates are not as competitive as having those in just one mortgage. 
  • You have to take into consideration that sometimes these loans come with arrangement fees that can be a bit higher than main mortgages.

Tips for debt consolidation:

  • Look for lower interest rates

It’s important to research and estimate beforehand on how much the loan will cost you. Before committing to a loan, do not forget to carefully read through all of the terms and conditions — length of the term, fees and interest rate, and more.

  • Make a budget

A good budgeting plan will always help you to manage your finances, set financial goals and pay off debt easier. It also clearly sets up your boundaries on your spending and the freedom on other guilt-free expenses. Create a monthly budgeting plan and try to stick to it.

  • Speak to a financial planner or a credit counselor

A certified financial planner can benefit you in so many ways with his/her professional help. She can develop a budget and debt repayment plan for you. You can also refer to an advisor at your local bank branch for help as an alternative. Remember that a credit counselor can help you establish healthy spending habits. 

  • Use credit wisely

One of the most important aspects of getting a qualification on a mortgage is your credit’s good rating. A good rating of a mortgage means that you will be more likely to get approved for a new mortgage. The vice-versa works in case of a bad rating. In order to improve your rating, don’t forget to pay bills on time and don’t miss payments.


Share This Page On: