Juggling multiple loans at once can be a stressful task for many Australians but what if there was a way to combine your debts under one loan and pay less interest. Good news, that process exists, and it is called debt consolidation.
People can often find themselves overwhelmed with the amount of loans they are taking out as they cannot keep track of them all. Taking out a variety of loans to pay for your lifestyle can accumulate large amounts of debt as interest rates continue to rise.
Debt consolidation helps consumers in both aspects, freeing up time and money for more important activities. If you are a homeowner with a mortgage and several other loans, this blog is for you as we will discuss what debt consolidation is and provide an example to better your understanding.
What is debt consolidation?
A major reason people refinance their home is to consolidate debts. While the cost of living is rising it’s easy to find yourself in a situation where your monthly credit card bill and buy now pay later bills are reaching an unmanageable point.
When you have multiple debts, such as credit card debt or personal loans, you generally pay high-interest rates on them. By consolidating your debts into your home loan, you can reduce the overall interest rate you’re paying and simplify your finances into one regular manageable repayment.
Refinancing can also allow you take out just enough from the equity in your home to ensure you have an emergency fund to ensure you don’t fall back into the same position.
Example of debt consolidation
Consider a family in Sydney with a home valued at $800,000 and an outstanding home loan of $500,000. They also have credit card debt of $10,000, a personal loan of $15,000, and buy now pay later debt of $5,000. They are paying high-interest rates on each of these debts, resulting in high monthly repayments.
By refinancing their home loan and accessing $35,000 of equity, they can pay off all their debts and consolidate them into their home loan. By consolidating their debts, they can reduce their overall interest rate and simplify their finances with only one regular repayment to manage and budget around.
Assuming their current home loan interest rate is 5% and their current credit card and personal loan interest rates are 15%, and their buy now pay later debt has an interest rate of 20%, they could be paying over $1,240 per week in repayments. This would likely put stress on any household budget.
However, if they refinance their home loan at the same interest rate of 5% and consolidate all their debts into their home loan, their new repayments could be reduced to around $663 per week. This could result in a weekly saving of over $580 per week or $30,160 per year in repayments, which could be used to take the pressure off their cost of living and even pay off their home loan sooner.
In this scenario, they not only benefit from lower overall interest rate, but they also have the peace of mind knowing all their debts are in one place and under one regular repayment. It’s important to remember that accessing equity will increase your loan amount, so you’ll need to ensure that you can comfortably afford the new repayments and seek advice from a financial professional before making any major financial decisions.
We can help with your mortgage!
Need help choosing a lender? One Click Life can help you choose a lender that best suits your needs so you can consolidate your finances.
Not in the market for a mortgage? One Click Life can also take care of your Taxes, Wills, and Health Insurance. You can also claim your online tax agent and online tax return fees back on tax, so why not let us maximise your tax return while minimising your tax payable.