Consolidating Debt as a Shortcut to Home Loan Affordability

1 February 2017
As we take stock of the post-Christmas spending it is sometimes sobering to note the level of short term debt that has piled up. These debts such as Personal bank loans, Hire Purchase, Store and Credit Cards are generally set up over shorter repayment terms due to the higher risk attached because of the size and nature of the products being purchased. Often the interest rates are much higher as well, meaning that the size of the loan repayment is inflated. As a consequence of this, when home loan affordability is being calculated by lenders, any payments that are being made on short term debts will reduce the surplus of household funds available to meet the new loan payments and as many banks are now using calculators requiring a larger surplus, any of these existing debts may well compromise your plans of home ownership.
The other implication of high interest, short term debt is that any funds that may have been otherwise put towards savings are being used on repaying the existing debt. The lack of savings will restrict the number of lenders that can be approached as well as limiting the types of products available. So, how do you increase your chances of obtaining a loan approval to take advantage of the current low interest rates and housing affordability during the present market conditions?
 
The answer is all in the planning. If you are serious about purchasing your own home then you need to work on reducing your debt levels. If due to a lack of savings for a deposit you are applying for a loan at a high percentage of the purchase price, then it is unlikely that you will be successful if you also have other loans being repaid. While there is sometimes an option to consolidate external debt within new borrowing, lenders will require a higher amount of equity for loans that are going to incorporate funds to clear the previous amounts borrowed. The best way to improve your options is to look at ways to clear your short term debt as quickly as possible. One option could be to try and transfer existing high interest debt onto a lower rate Credit card or loan. Although this will reduce the required payment amount, by continuing to pay the same figure that your previous loans totalled you will clear the debt or at least reduce the balance at a much faster rate.
 
It may also pay to speak to an adviser to get an idea of the expected costs for mortgage, rates and house insurance, so that you can budget for your future expenses. By paying the difference between current rental property expenses and the expected costs of home ownership towards your existing liabilities, not only will you help to reduce the debts, but can also establish that the additional expense of purchasing a property will be easily within your means, which will make your application stronger when it comes to time to request finance to purchase your own home. 
 

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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