Press releases
Refinancing to consolidate debt can be a valuable strategy
1/07/2010
Many homeowners are looking to consolidate debt as a ‘circuit breaker’ on household budget pressure.
While refinancing your home loan to consolidate debts can be an effective strategy to achieve this, there are issues to consider.
According to Smartline’s Managing Director Chris Acret, borrowers with loans of about 95 per cent LVR (Loan to Value Ratio) would do well to speak with a mortgage adviser if they were considering refinancing.
“In recent months, lenders have significantly tightened the criteria on which they assess loan applications, including the LVR, affordability and living expenses assessments, as well as credit scoring,” Mr Acret said.
“So, generally speaking, if a property owner looking to refinance in order to consolidate personal debt took out their mortgage in the past year or two at a high LVR – say around 95 per cent – and they haven’t yet built much equity in the property, then they may need assistance to refinance based on the property’s LVR and lenders’ affordability assessment rates, which are far more stringent.
“On the other hand, borrowers with significant personal debt levels who have built equity in their homes in recent years may be able to access that equity in order to pay out personal debt.
“This is typically called a top-up and allows home owners who meet the lenders’ criteria to borrow additional funds against the value of their home.
“Whatever your situation, though, it is critical to talk to your mortgage adviser who is up-to-date with lenders’ criteria and can talk you through all of your refinancing options.”
Mr Acret said that while the mortgage market had changed in recent months, there were a few simple steps homeowners could take to reduce and clear debt, and improve cash flow.
“As a priority, clear any unsecured debt in your household – assess your spending, write up a budget and, if necessary, cut up your credit cards,” he said.
“If you’ve never used a budget and you’re not sure where to start, consider accessing one of the many free online budgeting tools. You’ll want one that meets your unique personal needs – so take the time to find one that’s right for you.
“Then, begin by recording all of your expenses for the month. This is often a confronting, but very valuable exercise.
“How much of your monthly income is being spent on things you need versus things you don’t need – such as magazines, takeaway coffees, impulse purchases, dining out or buying lunch at work instead of making it at home? Cut out as much of this type of spending as possible.
“Once you’ve worked out where you can save money you will have improved your cash flow, which you can then direct into paying off any unsecured personal debt, such as credit cards, personal loans and store cards.
“While this approach does require discipline, it’s important that you’re not too hard on yourself. If your budget is too tight, you’ll find yourself running out of money which may force you to use your credit cards.”
In addition, Mr Acret suggests homeowners regularly review of every aspect of their financial situation.
“It’s very empowering to rein in your spending and see your debt levels reducing,” he said.
“It’s just as important to keep speaking with your mortgage adviser about changes in the mortgage market and how they affect your financial situation.
“A good mortgage adviser will always look out for your interests. You should also expect them to have an intimate knowledge of the current state of the lending market and work with you to ensure your loan structure is right for you.”
As always, talk to your Smartline Personal Mortgage Adviser for more information.
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