If you’re juggling multiple debts and struggling to keep up with repayments, debt consolidation may be a solution. One way to do that is to use your home’s equity to consolidate debt into your mortgage. That can lower your interest charges and simplify repayments. But is it the right move for you? Read on to find out what you need to know about accessing your home’s equity to pay down your debt.
What is home equity?
Equity is the difference between your home’s market value and the amount you still owe on your mortgage.
For example, if your home is worth $800,000 and you owe $400,000, you potentially have $400,000 in equity.
Some lenders allow you to borrow against this equity, which means you could access some of that money to consolidate your debt.
How much equity could you access?
Most banks allow you to borrow up to 80% of your home’s value if you live in the property, but you will need to meet specific lending criteria.
For example, if your home is worth $800,000, you could potentially borrow $640,000 (80% of your home’s value) less the $400,000 you owe on your mortgage. That leaves up to $240,000 of accessible equity.
However, borrowing more increases your mortgage and your repayments, so it’s important to consider whether this is the best option for you.
What are the benefits?
- Lower interest rates: mortgage rates are often lower than credit card or personal loan rates, so you would save money on interest charges.
- Simplified repayments: By consolidating your debt into your mortgage, you’ll have just one repayment instead of multiple.
- Improved cash flow: The money you save on interest charges could be used to cover other expenses.
- Faster debt repayment: By paying less interest, more of your repayment goes towards reducing your debt, so you can get debt-free faster.
What are the pitfalls?
- Longer repayment term: Although mortgage interest rates are lower, your loan term is longer so you could end up paying more interest over time.
- Risk to your home: As your mortgage is secured against your home, check that you can afford the additional repayments with a higher mortgage.
- Not a long-term solution: It’s essential to address and make changes to spending habits to avoid future financial difficulties.
How do you access your home’s equity?
If you have enough equity in your home, there are two ways you can access it for debt consolidation:
- Top-up loan: Borrowing extra funds against your home's equity with your current lender. The amount you could borrow will depend on your available equity and your ability to make repayments.
- Refinancing: Switching to a new mortgage, either with your current lender or a new one, and borrowing extra funds to consolidate your debt. Refinancing may also give you the chance to secure a lower interest rate or better loan terms.
What are some other options?
If using your home’s equity doesn’t fit your situation, there are some other ways to consolidate debt, including:
- Personal loans
- Balance transfer credit cards
- Budgeting and repayment plans
Get help understanding your options
Consolidating debt into your mortgage can be a smart move that simplifies your finances and helps you pay down your debt faster. But it’s not for everyone. Talk to a Mortgage Express adviser to understand your options and get advice about a debt consolidation solution that fits your financial situation. Contact Mortgage Express today to connect with an adviser near you.
