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Renita G.
Renita G.
Amamoor, QLD
6 Likes
5 Followers

Hi there. Trying to work what makes more financial sense over a longer period ...paying out a higher interest personal loan with withdrawing cash currently sitting on my house mortgage OR leaving the $$ on the mortgage? The interest rate is 12% v 4.95%

5 years ago
Comments

Personally I would investigate consolidating the two debts through refinancing. I am sure you could get a lower rate home loan. I would however increase the repayments over what is needed so you pay down what you put onto the mortgage from the personal loan sooner. If not while at a lower rate on the mortgage you are paying it over 25-30 years and not 5-7 years.

Responses

Hi Renita thank you for your question.
This is a very good question and there maybe a few different answers
As a broker I would want to establish the reasons you would be looking at paying out the personal loan. If it is simply to reduce your outgoing expenses then adding it to your home loan would definitely do this. You would also need to consider the fact that, by doing this, you are using up equity in your home. This needs to be discussed as you may have other things that you want to do in the future that increasing your loan may affect.

If you're simply wanting to save interest over a period of time then adding this loan to your home loan would be of benefit, however you would need to work out what extra payments to make to your newly increased home loan to give you the most benefit. (you would not want to be paying the personal loan portion of over 30 years as he may end up paying more in the Long run.

A good broker will go through your full financial needs, and future needs and wants, to determine the best course of action for you.

I hope this helps and please ask more questions if you need clarification or give me a call.

Comments

Ok great. Thanks for the quick response!

Hi Renita

It is a great question – wherever you can save on the interest rate is makes reasonable sense to do so.

I agree with Deborah in terms of the considerations you need to go through in using up the equity in your home loan. If for example you do choose to use the available funds in your redraw to payout the personal loan and you haven’t had any difficulties in meeting the personal loan repayments I would suggest you try and stick to those payments.

For example if you had a personal loan of $10,000 over 5 years at 12% the monthly repayment is something like $222pm. If by withdrawing the $10,000 from the redraw and continued making the same payment of $222pm you would effectively pay off the personal loan portion within the home loan in just over 4 years and provide savings of around $2000. The savings would also contribute to reducing your home loan balance.

Just on another note it might be worthwhile contacting your existing lender to see what they are prepared to do to help you obtain a better home loan rate. 4.95% on an owner occupied home loan would be considered a little high in today’s environment.

I hope this helps

Comments

Thanks Paul. That really helps.

R

Paying the personal loan on the home loan rate but under the same time frame or faster would benefit you.

Ie a P/L of 10k maybe for 5 years. If you use the home loan money then you would like to repay the 10k over 5 years or less. Maintain same repayment amount but the lower rate will see you pay off the 10k faster.

Assuming the increase of the home loan doesn't create other issues like mortgage insurance etc.

I hope that helps.

Happy to discuss any time.

Comments

Thanks Alex ! Appreciate the insights.

Hi Renita,

I would suggest that you use the cash that you have sitting in your home loan currently to pay out the personal loan. Then once that is paid out I would arrange to have the amount of the payments that you were contributing to the personal loan back to the home loan to reimburse the funds you withdrew as soon as possible.
I hope this helps.
Happy to discuss further in need.

The benefit of using the redraw is obviously saving interest the downside is you are using equity which you may want to use for other purposes such as an investment property purchase.

I think you have answered your own question here. Get rid of the higher interest rate loan. You could use a separate split on your mortgage for the loan you are paying out which give you the ability to track your progress on paying it off. If you keep up the same level of your current repayment you won't incur long term interest accumulation. If you're need help let me know. Kind regards Andrew

Assuming both debts are non-deductible, then it is always going to be more beneficial to pay out the debt with the higher rate of interest. However, if the debt is used for investment purposes it will be deductible debt or 'good debt' and in this case it may be beneficial to leave the 'good debt' and focus on the repayment of non-deductible or 'bad debt'.

paying a lower interest rate enables you
repay more off what you owe. this would make sense to enable you yo repay the full debt

If its financial sense you want. Work overtime or a second job and pay off the personal loan faster with the extra income.

Always clear expensive debts as a matter of urgency

But have a plan to ensure it never happens again

Hi, maybe set up a seperate home loan and then
Pay the same payment you are paying in the personal loan which will dramatically reduce interact using equity In your home. 😄

Hi Renita, my advice is always if the equity is available in the home (so you won't be impacted by mortgage insurance) then consider rolling the personal debt as a separate split within the mortgage portfolio over a 5yr term. Then you get the best of both worlds! Consumer debt at mortgage rates :) let me know if I can help you with this and find a suitable lender & structure! Peita

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