How to avoid refinancing for debt consolidation

Without these tips, you could pay more in the long run when you refinance your mortgage to consolidate debt.Avoid refinancing for debt consolidation

Switching home loans could cost you money, so you need to be careful before you decide to refinance your mortgage with a debt consolidation loan. Some brokers or lenders may have a conflict of interest or may make misleading claims about the amount of money you’ll save or the ‘simplicity’ of rolling all your debts into your home loan.

While refinancing your mortgage with a debt consolidation loan may be useful for some borrowers, you should consider alternative ways to manage your finances. In some instances, it may be beneficial to avoid refinancing to a debt consolidation home loan.

1. Negotiate with your lender

If you’re no longer in a position to meet your mortgage repayments, you should speak with your lender to see if you can come to a new arrangement. For instance, you may be able to negotiate a lower rate with your existing lender, which could greatly reduce the amount of interest payable over the life of the loan.

For example, if you took out a mortgage of $471,000 at a variable rate of 5.24% and you refinanced with a lender that offered 4.74% – half a percentage point lower – you would save $143 per month or a total of $51,000 over the life of a 30-year home loan. These cost savings could help you avoid mortgage stress.

Your lender may also be able to offer you a repayment holiday if you are experiencing financial difficulty.

2. Avoid overborrowing

One of the most important decisions you’ll make when applying for a home loan is deciding how much you can afford to borrow. While it’s easy for many borrowers to get carried away (you may want to borrow an extra $10,000 to fund a kitchen upgrade), you must be realistic when it comes to estimating your borrowing capacity and budget for mortgage costs.

Knowing how much you can borrow will ensure that you borrow an amount of money that you can afford to repay over the life of your loan. This will pre-empt problems down the track, such as experiencing mortgage stress, entering into a debt spiral or facing the need to refinance your home loan through debt consolidation.

Use our calculator below to estimate how much you can afford to borrow. Simply enter your income, expenses and other financial commitments.

Work closely with an accountant, financial planner and a licensed mortgage broker to ensure that you search for a home loan that is within your financial means.

3. Apply for the right home loan (originally)

From the outset, you should surround yourself with the right professionals to ensure that you apply for a home loan with features that suit your personal situation. For instance, if you're a first home buyer, you may want to apply for a standard variable home loan with competitive interest and limited fees to minimise your ongoing costs.

Opting for the right home loan with features that complement your individual situation could shape your ability to effectively manage and repay the loan. Discuss your needs with a mortgage broker who can help you source a home loan that will match your personal and financial lifestyle.

4. Liquidate assets

If you’re struggling to meet your mortgage repayments, liquidating your assets – such as selling your home or car – is a way to avoid refinancing with a debt consolidation loan. For most people, it will be more appealing to sell your home on your terms rather than wait for the lender or credit provider to sell it as a mortgagee sale.

Where refinancing through debt consolidation may not be financially viable, think about how you can better your financial well-being by negotiating with your current lender, understanding your borrowing capacity, opting for the right home loan and liquidating your assets.

If you can no longer meet your mortgage commitments, there is help available. The Australian Securities and Investments Commission (ASIC) offers free online financial and legal counselling services.

Still want to consolidate your debts? Read our guide.

Images: Shutterstock

Belinda Punshon

Belinda is a journalist here at Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I) First Home Buyer Special

Start your home buying journey with 2 years of fixed repayments and a reasonable rate from a big 4 bank. Available with a 10% deposit.

UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupied Variable P&I Rate — borrowing $700,000 or more

Pay no application or ongoing fees and get access to a redraw facility and flexible repayment schedule. Refinance to a UBank loan and you could get $1,000 in your USaver account (offer conditions apply).

Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150,000+ Owner Occupier, P&I)

New borrowers or refinancers from another lender get a discounted rate with this package loan.

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