A residential home loan is probably the cheapest form of debt the average person will ever have, assuming a rate of 4%. Other debts such as personal loans and credit cards can range anywhere from 6% to 20% plus. With this in mind, a lot of the time it makes more sense to consolidate more expensive debts into the home loan, secure the lower interest rate and use the spare cash to smash the debt and pay it off sooner.
Assuming that we had the necessary equity available in your property, you could potentially consolidate those expensive debts into your home loan and secure a massive boost to your household cashflow.
You have a home worth $1,000,000 and a home loan of $500,000. The monthly repayment on your home loan is $2,500 and the interest rate is 4.0%. You also have a $40,000 credit card that is maxed out. The monthly repayment is $1,200 and the interest rate is 22%. On top of that, you also have a $60,000 car loan. The monthly repayment is $1,800 and the interest rate is 12%.
So your total monthly repayment to the bank is $5,500, which is a huge drain on your cashflow. Plus, you are getting killed on interest, with the total monthly interest bill being $3,200.
How are you going to improve this scenario?
You have heard of the term ‘debt consolidation’, but you are not really sure how it works.
Allow me to explain.
Assuming that you meet the lenders regular requirements, there is an opportunity to refinance your home loan and consolidate the credit card and car loan debt into your home home. With a property valued at $1,000,000 you can potentially access equity up to an 80% loan to value ratio, or $800,000. Given the total debt is $600,000, including the home loan, the credit card and the car loan, there is plenty of equity to refinance the home loan and consolidate the credit card debt and the car loan. We will also extend the loan term back out to 30 years to help improve household cashflow.
This is a simple strategy that can reap huge rewards.
After 4 weeks, we have refinanced the home loan and consolidated both the credit card debt and the car loan into the home.
What are the results?
Well, the total monthly repayment has dropped from $5,500 to $2,900 per month. That means your cashflow is now $2,600 per month better off!
Also, the monthly interest cost has dropped from $3,200 to $2,000 per month. That means you are now saving $,1200 per month on your interest bill!
The Next Step
So, what are you going to do with your $2,600 in cashflow savings each month?
If I were you, I would use that cash to make additional repayments into your home loan and save a whopping $280,000 in interest costs over the life of the loan and knock a cool 18 years off the length of your loan!
That’s the power of debt consolidation done right.