If you are struggling to keep up with multiple credit repayments – credit card, car loan and mortgage – one option for simplifying the issue is to consolidate all the debts into your mortgage. However, there are also potential negative consequences for consolidating all your other debts with your home loan, so you should consider this strategy carefully and ask for independent advice before deciding.
So what are the pros and cons of debt consolidation with your mortgage?
Shifting from multiple payments to one payment
When you consolidate your debt, you only need to make one regular payment, so your finances are more organized and you don’t have the stress of doling out minimum payments to multiple lenders. Once you have streamlined your repayment plan, you may even be able to increase the amount of that one repayment.
Lower interest rate
Multiple debts is equivalent to multiple interest rates, yet when you consolidate all these debts, you are only paying interest on one loan, which is generally at a lower rate than before. This is an automatic saving. With one interest rate and one regular payment, your monthly payment will probably be much lower than usual, giving you the option of increasing the amount of your regular repayment to get on top of the loan faster.
Reduces the equity in your home
Unlike your car and the items, you purchase with your credit card, your home is an investment which will appreciate in value. Your goal is to increase the equity in this asset for your own financial security. Yet when you combine your home loan with your other debts, you are reducing your equity without any increased value of assets to balance it out.
Risking your secured loan
Another difference between a mortgage and your other debts is that a mortgage is a secured debt – if you cannot pay it, the lender can take something from you in lieu of the debt. In contrast, if you cannot make your credit card payments, it will affect your credit rating and your ability to get another credit card, but it won’t have a significant impact on your overall security.
Consolidation loans are also secured loans. When you consolidate all your debts into your home loan and then cannot manage to make the repayments, your home is at risk.
More costly in the long term
While your minimum monthly repayments may be reduced in the short term, your long-term debt may be increased. For example, if your car loan was taken over a five year term and then consolidated into your 30 year home loan term, then the interest on the original car loan will actually be increased so you are ultimately paying more for your car.
Debt consolidation can be a valuable tool for some borrowers but can be difficult for others. Contact us today if you would like expert advice on whether debt consolidation is the right strategy for you.
Contact us to discuss your individual situation to which strategy fits your needs.
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