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An environment of record-low rates where banks are keen to lend to owner-occupiers provides the deal time for borrowers to mitigate their financial risks, according to Smartline Personal Mortgage Advisers.
The brokerage believes one of the key ways to do this is to look at rolling non-mortgage debt into a consolidation home loan.
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Smartline’s state manager Michael Daniels says this is a sound strategy for a range of home owners – from those who are experiencing financial stress to those wanting to get ahead.
“Almost every time we come across someone in mortgage repayment stress we find that credit cards and personal loans are the culprits,” Mr Daniels said.
“Our first response to this situation is to look at a consolidation home loan as this can significantly reduce the immediate cash flow burden on a borrower.”
While borrowers could save thousands by choosing a mortgage option over a credit card or personal loan, Mr Daniels warns that some caution does need to be exercised when consolidating debt.
“The overall interest cost of a loan is usually greater when the loan term is extended,” he said. “So if you are consolidating debt, it’s important not to stretch the repayments out over a 30-year term.
“One good way to avoid a higher ‘life of the loan’ interest cost is to make additional repayments (above the minimum) on your home loan once the debt is consolidated.”
Much of the Australian property market has experienced some level of capital growth over the last year or two.
“This means that many people now have enough equity to combine their personal debts into a home loan,” Mr Daniels said.
Meanwhile, interest rates are at record lows which means that we can borrow more on our incomes. If interest rates begin to rise again, you may not be able to have a consolidation loan approved by the lender, according to Mr Daniels.
While none of us plan to have lower income, and none of us plan to lose our income, it remains a possibility.
“Many of us take on income protection insurance for illness or injury but we can't protect ourselves from business failure or the loss of a job. No income, no consolidation loan,” Mr Daniels said.
“There are a number of considerations with consolidating debt into your home loan and the strategy needs to be discussed with an experienced mortgage adviser in light of your individual situation.”
[Related: Step away from interest-only loans, says Smartline]
