How To Pay Off Your Debt Faster Using Your Home Loan
Many borrowers neglect to consider the option of using their home loan to consolidate debt. It is quite common that in the years following a home loan approval, borrowers will take out personal loans and credit cards for a variety of reasons. It is also quite common that some years down the track they attempt to consolidate their debt through a personal loan.
Whilst this strategy can be effective in deserving cash flow and making it more manageable by having everything in one loan, it is worthwhile looking at using a home loan to achieve the same purpose.
Let’s take an example. A couple with a mortgage of $350,000 over 30 years at an interest rate of 6.5% will be making monthly repayments of $2212. Let’s assume they have a personal loan for $10,000 over five years at 12% requiring a monthly repayment of $222; another personal loan of $15,000 over five years at 11% requiring a monthly repayment of $326 and a credit card maxed out at $7000 requiring a monthly repayment of $210.
This makes their total monthly commitments $2970, with the non-home loan repayments totalling $758. So, if they can consolidate their total debt of $32,000 into a personal loan that costs less than $758 per month, they will be in front.
In today’s market a personal loan of $32,000 over seven years at 11.5% will require a monthly repayment of $556 meaning a saving to this couple of just over $200 per month. This is what makes a consolidating personal loan and attractive option and it is little wonder that many people go down this road.
But let’s consider for a moment that the couple makes an alternative decision to increase their home loan for the same purpose. By taking out an additional home loan of $32,000 they have a choice of starting a new term of 30 years or adding to their existing home loan over its remaining term. Let’s assume they added to their existing loan over a remaining term of 25 years.
A home loan of $32,000 at 6.5% over 25 years will cost this couple $216 per month. This makes their cash flow $540 better than their current position. Whilst this looks like an even more attractive proposition than a personal loan there is a sting in the tail.
The new $32,000 debt will take 25 years to repay unlike the personal loan which would have been paid off over seven years. But, if this couple was prepared to pay a personal loan repayment of $556 per month than they should be prepared to make the same repayment on the home loan. If they do this, that is make repayments of $556 per month into their new home loan of $32,000, the loan will be paid off in 69 months. This means it will be paid three months sooner and will save the couple three repayments, a total of $1668.
This repayment strategy will not work in every situation but it does show the benefits of using home loans to consolidate personal debt provided you are prepared to make some sacrifices and show some discipline in your repayment strategy.
