Should you consider debt consolidation?

PiggyBankAndMoneyIf you’re disciplined with finances, combining personal debts with your mortgage can save you money in the long run.   But discipline is the key word to consider!

Debt consolidation can lower your overall monthly loan repayments and the rate of interest that you are paying on your current debt.  If you have credit-card debt, store cards, personal loans or car finance you may be able to combine all this debt and add it to your mortgage.

For people lacking in financial discipline, debt consolidation may not solve any problems.

The root cause of the initial debt also needs to be addressed or it can still spiral out of control, especially as you will be taking on an even larger amount of debt when you get a mortgage.

By combining all debts into your home loan it is possible to select repayments that better suit your new financial situation.  This is effectively done by lengthening the term on the debt you currently have, as mortgages are generally over a term of 25 or 30 years – far longer than personal or car loans.

A longer borrowing term means lower repayments for your current debt but the downside is that even though a home loan will usually be at a lower rate than other forms of debt, it is usually over a longer term and could mean that you end up paying more in total.  But the biggest potential downside of debt consolidation is that for some borrowers it does not solve their problems.

If you are looking to consolidate debt when you take out your home loan you should carefully consider whether it was lack of discipline and/or financial skills that caused you to accumulate the debt in the first place.  If it was, you should consider cutting up your credit cards and closing the accounts to remove the temptation to get deeper in debt. Instead of credit cards, put some cash in a savings account or mortgage offset account for emergencies.

If you can, increase the repayment amounts on your new home loan so that the non-housing components are paid off as per their original schedule or sooner – that way you will be financially better off.

The Australian Securities and Investments Commission (ASIC) MoneySmart website has some great tips and tools including a budget planner to help you budget and manage your money.

Contact us if you have any questions about how you can manage your debt.