Debt Consolidation via a Mortgage

This is probably the most effective means of debt consolidation, but is also frequently misunderstood.

I wish I had a dollar for each application we received to consolidate existing debts with a new no deposit mortgage. Such a consolidation is not available through any Australian lender.

Let’s looks at a recent example.

The applicant was looking for a home loan of $300,000 for a property worth $260,000 – the extra $40,000 being for debt consolidation. This represents a 115% loan. Such loans are not available in Australia as the lender would have to offer more money than the property is worth.

You may have seen no deposit loans advertised. These loans still require the applicant to have sufficient funds towards the purchase expenses such as stamp duty and mortgage insurance. Mortgage insurance on a 100% loan is around 3% - therefore your 100% loan is actually 97% plus 3% mortgage insurance.

For a property worth $300,000 – stamp duty on purchase in Victoria (for example) is over $15,000. Mortgage insurance is around $9,000. This comes to $24,000 that you need to have in your own funds to purchase a $300,000 home with a no deposit mortgage. There is just no equity left for consolidation of other debts.

Of-course no deposit loans are not available to applicants with a less than perfect credit history.

So when can one consolidate existing debts into a mortgage? The answer is simple – you need to have more equity in your home than the amount of debts you would like to consolidate.

For example:

Outstanding Mortgage $200,000
Home Value $300,000
Other Debts $40,000

By consolidating other debts with your mortgage, your new mortgage becomes $240,000. This represents 80% of the value of your home and can be achieved easily for most applicants.

Happy Consolidating!