Debt Consolidation

What is debt consolidation and how can you use equity in your property to consolidate debt?

Debt consolidation is when you combine your short-term debts into one loan with a lower interest rate. If you’re ever having trouble paying high-interest loans, it could be worth consolidating your debts from car loans, credit cards, personal loans etc with the lowest interest rate available.

If you have good equity in your property, there’s no reason why you should be paying 15% on a car loan or 20% on your credit card. By working with iRefi, we’ll teach you how to use the equity in your property to consolidate your debt and pay the same interest that you’re paying on your mortgage.

Want to know how much you could top up to consolidate your debt?

Here’s an example

Let’s say you have a mortgage (5% interest) of $100,000, a credit card (20% interest) with a $10,000 balance and a $20,000 car loan (10% interest). Over the course of a year, your total interest expense would be:

  • Mortgage – $100,000 x 5% = $5,000
  • Credit card – $10,000 x 20% = $2,000
  • Car loan – $20,000 x 10% = $2,000
  • Total interest = $9,000

Using the equity in your property, you can top up by $30,000 to pay off the credit card and car loan. By structuring this as revolving credit (5% interest), you have the ability to pay off the debt as fast as you like (instead of paying it off over the life of your mortgage). The new interest expense would look like this:

  • Mortgage – $100,000 x 5% = $5,000
  • Revolving credit – $30,000 x 5% = $1,500
  • Total interest = $6,500

That’s a saving of $2,500 per year and because you’re paying less interest, you could put this $2,500 straight back into repaying the principal and pay off the debt even faster.

Want to know how much you could top up to consolidate your debt?

The pros and cons

Credit card debt can weigh you down and be a daily reminder of how you’ve let things get a little out of control with spending in different areas. Working with iRefi you’ll be able to roll debt from your credit cards, cars, personal finance and anything else into your mortgage debt. Consolidation of your debts can save you money, but there are risks. Some of the positives of debt consolidation:

  • The total interest you pay on your debt is lower meaning more of your repayments go on the principal of the debt, helping you to pay it off faster.
  • Debt consolidation can make budgeting easier because you only have to manage one loan which is paid at the same time each week/month.

Some of the risks with debt consolidation:

  • If you consolidate the debt into the main part of your mortgage (which you would do to lower the repayments) you’d end up paying off the debt over a much longer time period, meaning the total interest you pay on the debt is likely to be much higher. This is why you should consolidate debt into a separate loan from your mortgage.
  • With some banks, there can be extra charges including ‘hidden’ fees for alterations, late payments and payment defaults. You may also be charged a fee for paying off your loans early.

Debt consolidation won’t solve your money problems if you continue to spend more than you can afford and the debt grows rather than declines. You will need to be disciplined – your focus needs to shift to paying off your existing debt… not adding to it.

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