Mortgage Refinance and Debt Consolidation
Do you remember a time when... you first purchased a new home or investment property? Wasn't it an exciting time for you and perhaps your family as well?
Finally, the opportunity to move into your new home (or first home), gave you the freedom to decorate and improve your own chunk of real estate, without worrying about landlords or property managers saying what you could or couldn’t do!
This is the dream of most Australians!
Of course, unless you are one of the few that can afford to purchase their home with cash, most of us had to go to the bank, building society or credit union to obtain mortgage finance to purchase a home.
Probably like many others, you went through the daunting task of trying to find the right home loan for you. Some of the things you probably considered when selecting the appropriate loan was the interest rate, the fees as well as the loan product features, such as redraw facilities and offset accounts.
Finally your loan was approved and your property settled. You probably never spent too much time thinking about your future mortgage finance requirements at this time, other than making sure your monthly mortgage payment was paid on time.
However, like most things in life, things don’t remain static forever. Changes in our personal circumstances or needs are inevitable! Changes like:
- Starting a new business
- Starting a family
- Home improvements / extensions
- Purchasing a new or additional property
- Funding a holiday
- Purchasing a boat / caravan or a new car
- Funding requirements for school fees
And the list goes on...
However, there are also some difficult personal circumstances or changes that affect many Australians that can also include:
- Financial over commitment
- Marital breakdown
- Business failure and
- Unemployment or retrenchment
Of course, not everyone will encounter all of these life changes, however most of us will, at some stage, need to assess our financial circumstances to address one or two of these issues.
One of the key solutions or strategies that many Australians use to address these issues, often incorporates either a mortgage refinance strategy, or a debt consolidation solution.
If you believe that a debt consolidation or mortgage refinance strategy is appropriate for your needs, read on.
Tip Number 1
Be aware of the costs involved in Refinancing Your Mortgage or Debt Consolidation loan.
Critical to the success of any mortgage refinance or debt consolidation loan is being aware of all the costs associated with getting out of your current mortgage arrangement and
establishing a new mortgage finance / debt consolidation arrangement.
Costs incurred can include, early discharge penalty fees, legal fees, stamp duty, valuation fees and a range of establishment fees.
Only when you have a firm understanding of the costs involved, can you be sure that your refinancing / debt consolidation solution is the correct approach.
Tip Number 2
Should I fix the interest rate or should you take a variable rate loan (or both)?
It all depends on what you feel comfortable with. For many borrowers, fixing their new mortgage rate offers a degree of ‘comfort’, in that the monthly repayment will not change during the fixed period.
With historically low interest rates, this may seem like a good idea for many, however if for any reason the mortgage is paid out early (eg a sale or otherwise), there can be some stiff early penalty fees that may apply.
Conversely, when rates are higher (or when a borrower believes that rates may drop in the short term), many feel quite comfortable in accepting a floating or variable rate of interest.
For others again, there are also options to split the total loan into both fixed and variable options.
Underpinning any decision as to whether to fix or not to fix, an understanding of how much ‘interest rate risk’ a borrower is able to accept in making this decision is vital.
Tip Number 3
Should I consolidate all my debts into one loan?
There is no hard and fast rule here. For many borrowers who are struggling with loan commitments such as credit cards, car loans, store cards and personal loans PLUS a mortgage repayment, a debt consolidation loan is often the answer.
The two key benefits of a debt consolidation strategy must incorporate two key benefits:
- A reduced interest cost compared to their existing unsecured debts (Personals Loans, Credit Cards etc) and
- A reduction in the overall monthly loan commitment to ensure borrowers do not fall behind in their repayments and have adequate disposable income to budget for household needs.
A sound consolidation strategy may also involve the use of split mortgage loans. where your home loans do not increase, but a second home loan account is established (not a second mortgage) which consolidates all other debts at home loan rates. This manages two things for you;
Firstly, you can isolate your other debts into one account and then establish a direct debit from your transaction account to pay a single payment that aims to retire this consolidated debt within an appropriate time frame say 5 years.
The benefit here is that you will not extend your consumer debts over a home loan period of up to 30 years and you will also consolidate high interest rate debt into home loan interest rates.
If however you wish to stop your direct debit for this account for a short period to cater for seasonal expenses like Christmas etc, you have the flexibility to do so and once you go back to normal expenditure periods, simply return your direct debt payment back to the 5 year repayment figure once more.
Too often, so called financial experts have offered no other advice other than to instruct cash strapped and financially over committed borrowers to pay off their credit cards as soon as they can. Too often, these borrowers face default and financial ruin by trying to rob Peter to pay Paul.
If you could consolidate your debts, isolate them into an account that will be paid off over a 5 year term (or earlier) at a rate of interest often 20% p.a. lower than other consumer debts, surely this is appropriate advice.
Call Assent Mortgage Finance for more information.
Sometimes though, a debt consolidation strategy is just not appropriate. Some borrowers may simply have too much debt and not enough equity in a property for lenders to secure against or the benefits of consolidating may not be worth the ‘costs’ involved.
In some instances, borrowers who have taken on too many commitments, genuinely do not have the financial capacity to repay and may in fact be technically insolvent.
In these circumstances, alternative solutions may be available through an insolvency specialist.
However, for the vast majority of borrowers considering a debt consolidation loan, the strategy is very effective.
Tip Number 4
Make sure your consolidated loan repayment is lower than your previous total commitments.
This is a must. The whole purpose of a debt consolidation strategy, is to ensure a reduced monthly repayment schedule for all loans in the aggregate. If this is not the case, the strategy should not be considered.
Tip Number 5
Weekly and/or fortnightly payment facilities can cut the term of your mortgage by several years.
The benefits of paying mortgage instalments on a weekly or fortnightly basis are well known, but unfortunately some loans do not allow this type of repayment schedule.
If paying your loan off sooner rather than later is mandatory, then careful consideration of the loan product and features must be considered before entering into any refinance or debt consolidation strategy.
Tip Number 6
Don’t accept the first mortgage refinance / debt consolidation proposal offered without an adequate awareness of alternatives.
Too often, borrowers grab the first mortgage refinance / debt consolidation proposal put to them, without realising that there may be better and more suitable financing strategies available.
By locking into the first mortgage refinance / debt consolidation proposal offered, could mean the difference in thousands of dollars in loan repayments over several years. Also, the costs of rearranging future finance could be significant, if the correct solution isn’t secured first.
Tip Number 7
Can I consolidate my ‘bad credit’ loans?
Yes you can, however refinancing or consolidating your ‘bad credit’ loans depends on the state, extent and nature of your current or past credit history.
In most cases, borrowers who have encountered financial difficulties have not done so intentionally. For a whole host of reasons, many borrowers have found themselves in financial difficulty for reasons including temporary unemployment, marital breakdown, business failure, unforseen medical expenses etc.
For many borrowers, all that is required is a fresh start with a specialist lender who is prepared to assess their mortgage refinance or debt consolidation proposal with a greater understanding of the factors that caused the adverse credit history in the first place.
Tip Number 8
Alternatives to ‘Debt Consolidation’ loans / Bad Credit / Arrears.
In some circumstances, no matter which way you look at it, mortgage refinance or debt consolidation will not be the answer for everyone.
In extreme cases, borrowers may be in such a poor financial position, that assistance to refinance or consolidate their loan outstandings is unlikely to succeed.
This may be due to:
- A permanent loss of their income source
- Reduced earnings capacity
- Financial over commitment or
- Inadequate equity in the property being offered as security
Of course there are many other circumstances that may preclude a mortgage refinance or debt consolidation strategy to be employed effectively, however topping the list is being in state of ‘insolvency’.
What this means is that whichever you look at your personal financial circumstances, you are unable to meet your loan commitments on a regular and timely basis.
For these reasons, the assistance of a professional insolvency practitioner or a Financial Counsellor would be essential. These professionals can then identify alternative strategies such as:
- Advocating on your behalf, debt repayment plans
- Seeking a moratorium on your payments
- Formal Part IX, Debt Agreement proposals
- Part X and Bankruptcy advice
Tip Number 9
Using a ‘Mortgage Refinance’ strategy to purchase additional property or other investment assets.
If you are considering the purchase of an investment property, not only will you be seeking appropriate mortgage advice for the purchase, you should assess your current home loan position for it’s appropriateness as well.
By structuring the two loans (home and investment) in the most effective manner, can save you money and effectively allow you to address any future funding needs for your property portfolio as well as additional requirements in the future.
Too often, borrowers assess their current mortgage needs, without reference to anticipated funding requirements in the future.
Simply put, each ‘financial transaction’ is treated in isolation, hence the need to reappraise and restructure their mortgage position continually.
Not only is this a laborious and time consuming task, it may also cost you significant dollars each time a new financial decision is made.
By structuring your funding requirements with future needs in mind today, you will then have a more seamless and effective approach in place for your next ‘investment’ decision.
Tip Number 10
Get professional advice.
This is perhaps the most important factor in developing an effective mortgage refinance and/r debt consolidation strategy.
There are many sources of mortgage advice available to borrowers; however the level of professionalism is variable.
What should you know more about your mortgage adviser?
- Qualifications
- Experience
- Licence
- Professional Indemnity Insurance
- Complaints resolution scheme
- Code of Ethics
- Peak body membership
These issues need to be discussed to ensure that you are dealing with a professional mortgage advisory firm that has your interests in mind.
We believe that at Assent Mortgage Finance, our offer is second to none, for personalised and professional service.
Call Assent Mortgage Finance on 1300 728 696 for an obligation free discussion regarding your mortgage refinance and/or debt consolidation needs.