Consolidating Debt Using Home Equity Loans

By: Aaron Robbins0 comments

Getting on top of your finances can be one of the most liberating financial feelings. Consolidating debt is one strategy that can streamline and simplify your debt and your cash flow.

If you’re both a property owner and a business owner, you may be able to unlock the equity tucked away in your property to perform a debt consolidation and accelerate your path to financial liberation.

We discuss how below.

What is debt consolidation?

Consolidating debt is essentially rolling all of your existing debt amounts into one loan or finance solution. By ‘paying out’ many smaller loans, you then hold the same level of debt (your total debt amount). However, it is managed through one lender, with one monthly payment amount — instead of trying to manage multiple monthly repayments across multiple financial institutions. A loan for debt consolidation can make finance much simpler, more cost-effective, and could even help you pay off your loan balances sooner.

Can you use a home equity loan to consolidate debt?

Absolutely, you can use a home equity loan for debt consolidation!

Home equity loans are used by business owners to fund renovations or home improvements, cover lifestyle expenses, boost their business’s working capital, and of course, consolidate their debt!

How does a home equity loan work?

Home equity loans work by utilising the equity that’s sitting in your home (or investment property)’s value to secure funding that can be used to roll all of your debts into one. Given the recent rises in Australian property prices, and with most businesses now back into the swing of things after the height of the pandemic, now may represent an opportune time to access the equity that’s built up in your property.

How much equity do I need to use a home equity loan?

That all depends on how much money you need to be able to consolidate your existing debts. With a Diverse Funding Solutions home equity loan, you can access up to 75% of the available equity in your home. If you own your home outright, then this means you could access up to 75% of your total home value to put towards a debt consolidation.

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Calculating your available equity

A very basic way to calculate the equity that you have in your property valuation is to take the current valuation and deduct your current mortgage balance. The remaining amount is a rough estimate of how much equity you have!

Good to know: the exact amount of available equity won’t necessarily be known until you have a more precise valuation of your property. Generally, we can use your council rates’ notice and latest mortgage statement to look at your equity amount.

How long do I have to repay a home equity loan?

If you have multiple forms of debt at moment, you may have some personal loans or other unsecured debt that you’ve locked in for years and years. A home equity loan from Diverse Funding Solutions is usually offered on terms between 1 – 3 years, meaning that you can get on top of your debt and repay it quicker than if you continued to pay off each debt account individually.

What interest rates are payable on home equity loans?

With the RBA increasing the cash rate target at the moment, it makes sense that interest rates are a major consideration when consolidating debt. Diverse Funding Solutions offers market-leading interest rates on all of our private finance solutions, including home equity loans.

A home equity loan generally comes with a more attractive interest rate than other loan types, such as personal loans or an unsecured business loan.

Just as with any other lending product, the final interest rate isn’t known until we have processed your loan application.

Why not get an express quote to look at what you can expect from a home equity loan?

Who should use a home equity loan?

A home equity loan can be a viable solution for business owners who are striving for better debt management, or want to reduce their debt load.

What loans can be consolidated using a home equity loan?

Really, any loan, credit product or other debts can be consolidated into a home equity loan. Because home equity loans tend to come with lower interest rates than other forms of debt, they can be useful to get on top of higher interest debts.

Credit card debt

Credit card payments can place a big strain on any business’s cash flow. Credit cards are typically high interest debt, so many business owners use home equity loans to get on top of their credit card debt.

Remember: A debt consolidation loan won’t automatically close down a credit card account, simply repay the owing balance. Home equity loan lenders may stipulate that one of the loans conditions is that you close the credit card account after repaying it.

Unsecured loans

Unsecured loans may be a high interest debt, as they have no security attached to them.

Did you know: if you’re a business owner, you can use a home equity loan to repay an unsecured personal loan in your name?

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What are the risks with home equity loans?

Repaying your home equity loan

If you’re already experiencing trouble making existing repayments on your debt, consider whether you’ll be able to meet your home equity loan payment. This being said, a tight monthly budget can be given some breathing room when it doesn’t need to cover several monthly debt payments.

Lowering your home’s equity

Using your home’s equity means that it won’t be available to be used for other lending purposes, and may increase your debt-to-income ratio.

Not having adequate equity

Before you lodge a formal loan application, make sure that you have sufficient equity in your home to cover the debt amount you wish to consolidate.

Penalties for early repayment

Double check with your existing credit provider whether any penalties or fees will be incurred for repaying the account early.

Discover the benefits of using a home equity loan to consolidate debt

Life is busy, especially for small business owners. Outside the financial benefits of a debt consolidation, buying back precious time in your financial administration can be one of the main benefits to consolidating your debt.

One loan repayment, one financial institution to liaise with, one set of fees, and one interest rate can provide ample financial and administrative benefits to the busiest business owners.

To discuss how you can consolidate debt and get in sound financial health using a home equity loan with Diverse Funding Solutions, contact our team who can guide you through the entire process!

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