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John and Sally asked us to increase their existing home loan to payoff credit card debt of $35,000 and a car loan of $6,000.

Their friends had advised them to look into consolidating their other debts directly into their home loan. Although that may have seemed like a good idea on the surface as their total monthly repayments would have been reduced substantially, they could have actually ended up paying a lot more back in interest in the long run had we just done that for them.

The main reason many people consolidate their debts is to reduce the amount of interest they are paying. Who wants to be paying in excess of 20% in interest on credit cards?

But a common mistake we see when clients have previously consolidated their debts is that they have just merged them with their home loan over a thirty year term and the other debts just become lost in the great scheme of things.

If you set up the finance for your new car over thirty years and then sell the car in five years time, unless you pay the whole lump sum you lent back on your loan, you’ll actually end up holding onto the debt for an additional 25 years – which dramatically increases the overall interest you’re paying for the car!

After explaining this to John and Sally they soon realised that this wasn’t the best solution for their future financial wellbeing! So we came up with a plan that allowed them to refinance their current home loan to a better interest rate, cancel out their exposure to inflated interest rates and still reduce their overall monthly payments.

Instead of just setting up one loan account for the new increased amount, we set up two “splits” both of which where secured by their home. One for their original loan amount on a thirty year loan term, and one for $41,000 for just five years. By doing this, they would benefit from all of their personal debts being made in one easy low interst rate monthly payment, and yet still keep it separate from their home loan so they had full control over how much they were paying back.

The final step was for the clients to cancel their credit cards, to ensure that they didn’t rack up fresh debts and end up exactly where they started!

Remember, whilst consolidating your credit card debt, car loan or personal loan into your home loan can be an effective way to reduce your repayments, you need to make sure you restructure your debts the right way.

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