06.Schemes to think twice about
Refinancing to a line of credit loan
Schemes involving refinancing your traditional loan into a line of credit mortgage, having your salary paid directly into that account, and using a credit card for daily expenses, with the bill paid by the line of credit loan, are sometimes promoted.
According to one bank, these loans (also known as equity loans) weren’t originally designed for borrowers to reduce their loans more quickly; they were primarily for people to access equity for investments.
The availability of credit is too big a temptation for some borrowers, so they end up not paying off their loan as quickly as they would have. Interest rates are often higher than standard mortgages and refinancing costs and fees can apply.
Anyone promising to cut years and interest off your mortgage for a fee
Avoid complicated and confusing plans. They can cost thousands in fees, involve unrealistic budgets and refinancing into a line of credit loan (see above). To save anything you’ll need to curb your spending and stick to a rigid budget, which you could do with your existing loan without paying thousands in fees.
Don’t get churned into a new loan (some unscrupulous brokers may do this to earn commission from the lender) unless it’s in your best interests. Switching lender can be very expensive and outweigh the benefit of sticking with your loan and making extra payments or negotiating with your lender for a better rate. Before switching, check out what exit fees will apply for the old loan, and set-up fees for the new one.
Using mortgage brokers has more on how to get the most out of a broker.
Debt consolidation traps
Consolidation means getting a new loan to pay out other loans and usually involves turning short-term borrowings (for example credit card purchases, an overdraft or car loan) into long-term debt secured against your home.
Your monthly repayments might be lower for a short time and while consolidating additional debts into a mortgage can work for some people, there are pitfalls. You could pay more interest overall, be paying back your credit card purchases over 30 years and if you default on this bigger secured loan, under the worst-case scenario, your home could be sold by the bank to recover the loan amount.
For more information on debt consolidation check out our free report on Credit card control.