Consolidate your debt
and reduce your monthly payments…
Credit cards and personal loans often carry very high interest rates. If you end up with lots of this high-interest debt, then just making the minimum monthly payments on your cards and loans can seem overwhelming when you also have monthly mortgage payments to worry about. You may be frustrated because your total debt doesn’t seem to be getting any smaller, despite a big chunk of your pay cheque going to your lenders every month.
If you own a home on which you made a down payment of at least 20%, then there is a way to make your situation more manageable: a debt consolidation mortgage. By putting together all your existing debt into your mortgage, you can significantly reduce the interest you’re paying each month and hence your total monthly payments. This is because your mortgage loan is backed by a valuable asset – your home – so it’s considered less risky to the bank than unsecured forms of debt like credit cards.
Let’s look at a simple example. Karen and Ben bought their home two years ago for $250,000. At that time, they took out a mortgage of $175,000 with a fixed interest rate of 4% for a 5-year term. Their mortgage is amortized over 25 years, making their monthly mortgage payments $920.54.
In addition to their mortgage, they have credit card debt of $5,000 with an interest rate of 20%. They’re just able to make the minimum monthly payment of $150. (Note that by making the minimum payment it will take Ben and Karen over 20 years to pay off the credit card debt!) They also have a loan of $7,000 for which their monthly payment is $350. In total, Ben and Karen have monthly payments of $920.54 + $150 + $350 = $1,420.54.
Now let’s see how they can improve their situation. Ben and Karen’s mortgage balance after two years is $166,472.03. If they consolidate all their debt by refinancing, then their loan and credit card debt will be added to their mortgage balance: $166,472.03 + $5,000 + $7,000 = $178,472.03. Based on an interest rate of 4% and the remaining amortization period of 23 years, they would now have to make only one monthly payment of $986.89 towards their mortgage. That’s a saving of over $400 a month!
Not only have Ben and Karen dramatically reduced their monthly payments, they only have to worry about managing a single payment each month. By consolidating payments, they are more likely to make every payment on time and in full, which will also improve their credit score over time. This will give them more options for future borrowing.
So if your monthly loan payments seem unmanageable, you should consider using debt consolidation to access lower interest rates, simplify debt repayment, and improve your credit score.