Consolidating your credit card debt at home loan rates can be an effective way to reduce the interest paid and allow you to be better off in the short and long term explains Robert Projeski of Australian Mortgage Options.
When to Consolidate your Loan
The silly season is well and truly over, and consumers are now facing the hangover from this period. Credit card bills are now in and consumers have to pay off all those Christmas presents, holidays, and those bottles of champagne from New Year’s Eve that went on the cards.
With the credit cards weighing people down as they meander back to work, smarter consumers are seeking comfort in the fact that they are going to consolidate their credit card debts at home loan rates and save themselves considerable money with the lower interest rates.
Tapping into Equity
Buyers who purchased property over the past 12 months in Sydney have enjoyed spectacular capital growth. According to QBE, the average house price in Sydney sits at $1.034 million in June 2015, with a further 7 per cent price rise expected by June 2016. Homeowners can either struggle under high credit card interest repayments, or take advantage of the wealth created in their property that has accumulated over this period to pay out these debts and move into 2016 without the weight of a high interest credit card debt.
So how does this work? There is generally a considerable difference between the interest rate consumers pay on their credit card repayments and their home loans. Credit cards can attract a rate of up to 20% interest, whilst home owners are now enjoying the lowest interest rates in 50 years and are paying around 4 % to 5 %, depending on the product and lender.
Consolidate to Lower Rates
The capital growth enjoyed by Sydney homeowners over the last 12 months means that they have increased equity in their properties; this allows homeowners to increase their lending capacity. Homeowners can use the increased equity in their property to borrow money to pay off their credit card debt. They can use this equity and set up a separate account to consolidate debts that are at a higher rate.
As an example, if you have a $20k credit card debt at 18% and payments at $600 per month, this can be a considerable burden on your cash flow.
If we used the equity, this would bring the minimum repayment down to $110 per month. But if they opted to pay the $600 per month, they would pay out the credit card portion in under 3 year.
This method should save you a considerable amount of money and hopefully you’ll have a little more money in your pocket.