What you need to know about debt consolidation

Rising levels of debt and finding ways to manage it is a concern for many of our clients. For some, it’s aiming to improve their credit score when applying for a mortgage or government home ownership scheme. For others, it’s being able to cover rising mortgage repayments or unexpected expenses.

Fortunately, there are a number of ways to manage debt, including debt consolidation and accessing home equity. Here are some things you need to consider when making a debt management plan that’s right for you.

Work out your debt management plan

It can be confronting seeing your financial situation laid bare, but it’s impossible to create a workable debt management strategy if you aren’t clear on your total debts and expenses. That means making a list of your debts, their current interest rates as well as your income and valuables. And don’t forget, lenders will want to see at least 6 months’ worth of recent bank statements anyway.

Once you have a full picture of your finances, you can begin to look at your debt repayment options. Part of that plan may mean prioritising which debts to pay off first, switching to a cheaper or drawn down mortgage and combining your debts into one consolidation loan that reduces the interest and fees you’re paying. It may also mean cutting back on non-essential spending.

What are the benefits of consolidating your debts?

Debt consolidation involves combining several debts including any personal loans, credit cards and your home loan, into one loan. It can make your repayments simpler to keep track of, with a single reoccurring repayment, rather than multiple payments with different interest rates to stay on top of.

Consolidating multiple debts into one loan also provides a timeline of when you can be debt-free and can give you greater control of your budget, by reducing costs such as a lower total interest rate and fewer fees.

If you’re concerned about how your debts are impacting your credit score, consolidating into one loan may be beneficial. While it may initially lower your credit score, over time it will likely improve as it’ll be easier for you to manage your repayments.

However, debt consolidation is not appropriate in all circumstances, so it’s important to consider whether it’s for you.

Considerations when considering debt consolidation

While streamlining your debts can sound like a no brainer, there are some risks and considerations before undertaking the process, largely will you be financially better off?

Initially there may be upfront costs such as balance transfer fees, closing costs and new loan fees and long term you may end up paying more interest overall. When you consolidate your debts into one loan and extend the length your loan to reduce your monthly repayments, you will end up paying more interest and spend more over the lifespan of the loan.

Debt consolidation and your credit score

If you already own property, remortgaging to a lower interest rate is something to look into. After all, even on today’s interest rates, your mortgage is lower than your credit card or personal loan repayments.

You have probably seen your equity rise over recent years, so freeing up that money via a draw down facility can look like a no-brainer. However, lenders don’t see things that simply. Lenders have to decide if you can manage the larger loan and like to see proof that you are managing your money well. They give just as much weight – maybe even more – to your credit score when deciding if you are suitable candidate.

Your credit score takes into account the amount of debt you already have and if you are struggling with existing repayments. It’s a good idea to assess your credit score before applying for a new loan to consolidate your debts and risking getting your loan rejected, as that lowers your rating.

We’re always happy to help you assess whether you are a strong candidate for a new home loan to assist you in taking control of your future.