If you are juggling multiple debts, one way to simplify your finances is by consolidating your debts into a single loan.
Debt consolidation can make it easier to manage your finances and under the right circumstances, has the potential to save money in the long-term.
The conversion process from personal loan to home loan can result in a more affordable, single loan under certain conditions.
Benefits of debt consolidation
When multiple debts are consolidated to a single loan, it can make repayments easier to manage. With financial discipline, some have been able to repay their money faster using this strategy.
Some other potential benefits of converting a personal loan to a home loan include the following:
- You may benefit from standard home loan rates if approved by a major financial institution.
- Your repayments may reduce if you get an affordable home loan interest rate.
- You may be able to improve your cash flow and enhance your savings.
- The stress of managing multiple loans may be reduced.
How do you convert a personal loan to home loan?
When you consolidate multiple debts into a single loan, it can streamline repayments and make them more manageable. Before you consolidate your personal loan to a home loan, speaking with a lending specialist or broker can be helpful.
They will provide you with the necessary information and also answer any questions you may have. These professionals will also help you go through the process of converting your personal loan to a home loan. Some factors that the lenders will assess when you apply for debt consolidation include the following:
- Timely repayment of your home loan during the previous six months
- Good credit history
- Stable employment history
- No missed repayments
- Timely payment of credit card bills and personal loan instalments for the last three months
- Strong financial situation that could improve your ability to make timely payments on the consolidated debt.
How much debt can be consolidated?
A debt consolidation home loan is not available to all borrowers. The lender must be convinced that you are financially capable of repaying the consolidated debt while also staying in control of future borrowings to receive approval. The amount that can be consolidated varies from one lender to another..
- Can I convert a personal loan to a home loan if the home equity is not enough to cover the personal loan amount? There may be some options where a portion of the debt is written off, and the balance is converted to a home loan. Your best bet is to speak to a lender about this.
Disadvantages of debt consolidation
Converting your personal loan to a home loan also has certain disadvantages, such as the following:
- There is a risk of losing your home if you are unable to make timely payments.
- Home loans are of a longer duration than a personal loan, which can increase the loan duration and result in a higher interest over the life of the loan.
- The loan to value ratio (LVR) increases when the personal loan balance is added to the home loan, which can result in an increase of the interest rate.
- In case the LVR increases to more than 80 per cent of the property value, you may have to incur the additional cost of Lenders Mortgage Insurance (LMI) or pay the risk fees.
- Some lenders may also charge setup fees for the new home loan package.
- As you repay your home loan, the equity increases; however, the accumulated equity may be lost when you consolidate your personal loan into a home loan as the home mortgage balance increases.
Can a personal loan be converted to a home loan? Essentially yes, but every individual’s situation is different. It’s important to explore the best options for you, based on your financial circumstances and needs.