- April 29, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Considerations for Debt Consolidation with Home Equity
Hello everyone,
I currently have a home loan of $505K and the value of my house is $730K. On top of that, I also have a personal debt of $17K with Latitude.
I am deliberating whether it would be wise to consolidate my debt by tapping into the equity of my home loan. Can anyone provide insights on the potential benefits and drawbacks of this decision? The monthly payments for my personal loan currently amount to $505, and it is becoming increasingly difficult for me to manage.
Any guidance or advice would be greatly appreciated.
Thank you in advance.
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Withdraw equity is just a buzzword way of saying borrowing money. Do the sums based on repayment period, if it’s going to take 20 years at 6% vs 5 years @ 20% then take that into account.
Everyone is quick to say “do it”. But everyone (except u/Additional_Earth3715) focused solely on interest rates. That’s a big part. The other part is loan term!
Let’s make some reasonable assumptions.
* Personal loan: 21.74% p.a. for 7 years
* Home loan: 6.09% p.a. for 30 years
**Generally, if you roll your personal loan into your home loan you will reduce your minimum repayment but pay more interest overall**.
Look at what your $17,000 debt will cost you in either scenario.
Leave it as a personal loan:
* Minimum monthly repayment: $395.52
* Total interest: $16,223.34
Roll it into your home loan:
* Minimum monthly repayment increase due to $17,000: $102.91
* Total interest: $20,047.36
Financially, the best thing you can do is roll it into your home loan but keep paying your current repayment from your personal loan. Otherwise you’re just dragging it out and paying more interest. 25% more interest over the 30 years.
I wouldn’t overcomplicate.
Get rid of the $17K, assuming there’s an interest rate differential, and focus on smashing your mortgage down as much as you can.
Since you haven’t told us the most important factor which is the interest rate, we’ll assume the personal debt is higher
So yes consolidating is a good idea. But unless you have redraw or offset the bank may not refinance and release equity with your additional debt.
Consolidation will leave you with more disposable income. However if you don’t plan to pay of the additional borrowing in a similar timeframe to the current personal loan, the financial benefits reduce.
Another option you may not have thought about is a separate loan secured by the property as well. Generally you will pay home loan rates on borrowings over a personal loan term. That way you don’t end up paying more by making lower repayments over an extended term of the whole mortgage. Banks will generally do this as a ‘split loan’ or supplementary loan.
I’ve done this for clients as I am a broker. Do a split loan on your mortgage so the personal debt is separated but still at the same rate as the mortgage. Repayments will very low for that part. You can make extra payments and the surplus can be redrawn at a time of emergency.
It depends if you need the extra cash now. Consolidating will cost you more in the long term with lower monthly payments.
yes it’s a good idea .. as long as you don’t just clock the debt back up ……
Absolutely consolidate and have an offset account that you can discipline yourself into not seeing as simply another savings account.
The cold logical thing to do is almost always to get as much loan funds as you can possibly get without detrimenting your interest rate (as some rates are only offered at lower LVR’s), and then strictly putting everything that you don’t need in the offset account.
The only reason you would not do something like that is because of self discipline reasons. Set some limitations and goals on saving and it will always be the most optimal solution.
The only two things that matter here are the interest rate and the repayments. Be sensible and you come out ahead on the refinance. Be silly and you don’t.
If you are going to pay off the personal loan with your home loan redraw and you are going to add your personal loan repayment amount to your home loan amount then you come off ahead by paying less interest and paying off faster.
If you pay off the personal loan and adjust the whole loan payments to match the lower rate, while still taking the same time to pay the 17k extra off the home loan you end up with more cash each week to spend on other things.
The answer is that you should and you should be disciplined with your repayments.
Problem is if it costs $3k in mortgage fees and govt charges to refi the $17k.