Personal loan and credit card repayments getting out of hand? Consider refinancing to a debt consolidation loan to combine your debts into one manageable repayment
Life can deal you unexpected hands such as health concerns, relationship breakdowns or a loss of employment which can affect your ability to service your debt. If you don't have the funds to pay for the expenses that arise from these situations, a personal loan or credit card can seem like a good option. Unfortunately, taking on additional debt is not always manageable.
This is where refinancing to a debt consolidation home loan may be useful. This type of home loan allows you pay out your credit card and personal loans under your mortgage. Instead of paying off multiple debts, you pay off all of your debts with one home loan repayment each month. This also means your debts are only charged at a home loan interest rate - which can be much lower than a credit card or personal loan interest rate.
Before you decide to refinance your mortgage with a debt consolidation loan, seek help from a licensed mortgage broker or financial adviser. In some cases, a debt consolidation mortgage can see you paying more in interest charges and fees if the loan is not structured correctly. This is because you may be turning short term debts into long-term debts, and thus paying more interest over time.
Refinancing to a debt consolidation home loan can lead to cost savings if you are strict with your repayments and you make a conscious effort to pay it off early, but be mindful of the risks and costs involved.
How does refinancing to consolidate debts work?
Refinancing to a debt consolidation loan involves reviewing your existing debts (and mortgage), and combining them into a new mortgage so that you have one monthly repayment, instead of several repayments.
Many consolidate their debts to try and make their loan repayments more affordable. However, this strategy must make financial sense where the cost of the new loan including fees and interest is less than what you are currently paying on all your debts.
What sort of debts can you consolidate?
- Credit cards
- Personal overdrafts
- Car loans
- Personal loans
Speak to a mortgage broker about refinancing to a debt consolidation loan
Which lenders offer debt consolidation options when refinancing?
It is important to note that not all institutions offer debt consolidation home loans. Below is a cross section of lenders who offer debt consolidation refinance.
How can I refinance to a debt consolidation loan?
- Identify your needs. If you're having difficulty meeting your debt payments, think about whether refinancing to a debt consolidation loan will benefit you financially. Consider your lifestyle and borrowing needs. What features do you need from your new lender? Are you thinking of settling down and having a family soon? Do you have a contingency buffer in place to cover your debt repayments if you encountered a lifestyle change? Do you have the discipline to manage the repayments?
- Speak to your lender. Contact your existing lender to see if you can negotiate the interest rate offered with your current mortgage. Your bank may be willing to negotiate a more competitive interest rate if you justify why you believe you should be entitled to a lower rate. This may ease some financial pressure from the interest portion of your mortgage repayments which may allow you to focus on servicing your other debts, such as credit cards or personal loans. However, if it’s a different loan type or features that you’re after, then it may be time to refinance to a debt consolidation loan.
- Calculate refinancing cost. It’s vital that you carefully estimate the total refinancing costs. Remember that you may need to pay a discharge fee, which could range from $150 - $350 as well as government charges to exit your current home loan. With your new debt consolidation loan, you’ll need to pay upfront costs such as application fees or legal fees charged by the new bank. You can use our switching cost calculator to get an estimate of your total refinancing costs. Remember to consult your accountant or financial planner to help you with the numbers.
- Compare refinance loans. Speak with a mortgage broker to discuss the type of debt consolidation loan that will complement your borrowing needs. You may want to scout for a mortgage product with features such as a 100% offset account, the ability to make additional repayments and a redraw facility to help you minimise the amount of interest payable over the life of the loan.
What factors should I consider when refinancing to consolidate debt?
One of the key things you need to know are the costs of exiting your current home loan and switching to a new one, as well as the impact of longer terms on your accumulated interest.
- Interest rates. Check both the interest rates of the old debts and the interest rate of the new home loan. The home loan interest rate indicates what your repayments will be and you will need to decide whether you want a fixed or variable interest rate.
- Longer terms. Be wary of longer loan terms for your personal debt. While the lower repayments may be appealing, stretching a short-term debt such as a credit card or personal loan over a longer term will mean you'll pay more interest. For instance, if you took out a $10,000 personal loan at 14.5% interest over 5 years, you would have monthly repayments of $235 and total interest payable of $4,117. However, if you decided to consolidate this debt into your refinanced mortgage over 30 years (even at an average interest rate of 4.5%), the total interest payable on this portion of the loan would be significantly higher as it is stretched out over a longer term.
- Annual or service fees. It’s important to know what fees and charges are applicable during the life of your loan. These can slowly add up which could defeat the purpose of refinancing in the first place.
- Lender and government fees. These range from fees charged to exit your current loan, to new fees such as stamp duty and other government levies.
- Your existing loan. If you’re ahead with your mortgage repayments, then you may want to consider redrawing against the mortgage to pay out your existing debts. This is usually less costly and extends your loan period by a small period of time.
- Should you use a mortgage broker? A mortgage broker can discuss your personal situation with you and identify the costs of refinancing your home loan. They can also advise on the best way to use this new loan to get the most out of it.
Jenny looks to consolidate her debts
Jenny has a mortgage and three credit card debts. She’s now finding it hard to make her repayments because her standard variable rate has gone up since she first purchased the property. Her priority is to lower her payments as she can't afford them right now.
Credit card 1
Credit card 2
Credit card 3
With monthly repayments of $2,480, it’s easy to see why Jenny’s having such a hard time making repayments. She then approached a mortgage broker to help her find refinance to consolidate her debts. A new low interest rate loan at 4.69% p.a. was negotiated for Jenny, paying off her debts of $295,780 with monthly repayments of $1,901.72 instead of her original $2,480.
However, the loan term was extended to up to 20 years which meant that she would be in debt for longer and eventually pay more interest over the loan term, unless she started making extra repayments towards her loan.
Should I refinance to a debt consolidation loan?
There are a number of reasons to consolidate your debts:
- It can help manage your short term debts that usually have a higher interest rate. This includes both personal loans and credit cards.
- It's easier to manage one loan rather than multiple loans.
The bad debt cycle test - do any of these signs sound familiar to you?
Bad debt is when you borrow money to purchase a throw-away item that you probably won't remember you own a month from now. If you can't meet your repayments and whether its secured by an asset or not, is generally bad debt. Here are some signs that you may be caught in bad debt:
- You're constantly borrowing from Bob to pay back Jill. You're borrowing money from one source to pay another.
- You pay off your credit card to only buy something else, getting into debt again.
- You only make the minimum repayments on your credit card.
- You have more than three different types of debt, including unpaid bills.
If this sounds like something you may be doing, then take caution when you consolidate your debts into your home loan. Paying back these loans will require a shift in your attitude, which means that you should only spend what is necessary after you've consolidated your debt. You will need to dedicate a larger portion of your income towards your debt consolidation loan for this strategy to work out in your favour.Back to top
What are the pros and cons?
- Convenience. Refinancing with a debt consolidation mortgage allows you to repay all of your debts with one manageable repayment. These debts can include existing credit cards and personal loans.
- Save money. If implemented correctly, you can save money on interest if you make a conscious effort to repay the loan as quickly as possible by making additional repayments.
- Accessing equity. Unlocking the existing equity in your home at a lower interest rate can be a good way to fund renovations on your existing property.
- Switching cost. You may have to pay exit fees to get out of your existing loans, as well as fees for setting up your new home loan.
- Longer to repay debts. When personal debt is consolidated into a 30-year mortgage it means that the short-term debt is being stretched out for the life of your mortgage. This means you could be paying interest on your credit card debt for as long as 30 years, which could cost you more in the long run. One idea to get around this is to make additional repayments on your loan so you slowly pay your additional debts off and fully make use of the lower mortgage interest rate.
What are some things I should look out for when refinancing to a debt consolidation home loan?
- Ignoring professional advice. It’s a good idea to seek advice from a professional about your options before making a decision. Refinancing involves fees both for leaving your current lender and from your new lender, so you need to make sure you’re making the right decision that will improve your financial situation. Keep in mind that the Australian Securities and Investments Commission (ASIC) offers free financial and legal counselling services to distressed borrowers.
- Not getting the best deal. Some lenders could take advantage of your financial situation and charge you a higher interest rate, as you’re seen as a higher risk. Some lenders also offer to refinance as an interest-only loan and although this gets you some release from your loan obligations, ultimately you need to pay back the whole principal.
Beware: Dodgy lenders and brokers
While very rare, in the past there have been some debt consolidation companies which have misled consumers. If you're worried about a service, make sure they don't do any of the following:
- Arrange a repayment schedule that has repayments you can't afford
- Ask you to sign blank documents or documents with false information on them
- Don't discuss your personal situation with you, nor the fees, charges and repayments
- Tell you not to worry about reading the paperwork
- Don't have a licence with ASIC
Frequently asked questions
Refinancing your home loan to consolidate debts is a step that should be taken with caution. Even though the potential savings you can make seem enticing, you always need to offset the savings with the costs of refinancing. If you’re experiencing mortgage stress, remember that you should always talk to your current lender first straight away.