Debts you should keep away from your home loan

Ultra-low interest rates create temptation, but think twice before adding these debts onto your home loan.

Record-low home loan interest rates look likely to stay with us for a couple more years.

And with rates below 2 per cent for the best variable and fixed-rate loans, mortgages have become tempting targets for savvy homeowners to lower their other borrowing costs.

For example, using your home loan to buy an income-producing investment such as quality shares or property makes sense if the asset pays 4 per cent income but the mortgage cost is just 2 per cent, because it’s an instant cash flow boost.

And debt consolidation loans can work when used wisely and the borrower stops their previous behaviour that caused their initial consumer debt blowout. The interest savings can be huge, but it’s pointless if another consolidation loan is needed soon after.

Here are five types of debt that can be dangerous to add to your mortgage.

1 CREDIT CARDS

Interest rates on credit cards still average near 20 per cent – ten times as much as a good mortgage deals.

But racking up a credit card debt, moving it to the home loan, then reloading the credit card again will only serve the purpose of extending the repayment time frame of that card debt by 10, 20 or 30 years. That’s a nasty price to pay.

If switching a stubborn credit card debt to your home loan, make sure you cut up the offending card so the debt spiral won’t repeat.

2 BUY NOW, PAY LATER SCHEMES

These modern-day equivalents of credit cards for many consumers don’t charge interest but their late fees for missed payments can add up. And, like credit cards, they promote the dangerous idea of buying stuff with money you don’t have.

Similar to credit card debt, transferring a buy now, pay later scheme debt to your mortgage can be a ticket to financial hell of you don’t quit the scheme as well.

Adding some debts to your mortgage may increase the pain. Picture: iStock.

3 DOUBLE BORROWING

Also, known as double gearing, this is a risky strategy used by some investors wanting to multiply investment gains.

They borrow money from their mortgage, then use that to buy shares as security for margin loan, which then lets them borrow to buy more shares, cryptocurrency or other assets.

When doubling up on investment debt a sharp sharemarket downturn can get you into big trouble fast.

I personally did this during the Global Financial Crisis in 2009, got burnt badly, and it took my investment portfolio a decade to recover.

4GUARANTOR FOR A BIG-SPENDING CHILD

The Bank of Mum and Dad has boomed in the past year and many parents are happy to mortgage more of their own home as guarantee for their adult children’s debt.

But if those children don’t have discipline and get into financial trouble, the bank’s demands to repay the loan can fall onto the parents.

5 LOANS TO UNRELIABLE FRIENDS OR FAMILY

Lending money to family and friends is tricky at the best of times, and using your own debt to do it multiplies the degree of difficulty.

It costs you money to lend cash to someone in this way. That alone causes tension, and their failure to pay on time – or ever – can destroy relationships.