How to consolidate debt with your home loan

Refinancing multiple debts to one home loan can help lower your monthly bills and save you interest.

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To consolidate debt into a home loan, you'll need to refinance to access money, which allows you to pay off your credit card and personal loans. Instead of paying off multiple debts each month, you pay one larger home loan repayment each month, with a single, lower interest rate than you were paying on your credit cards and personal debts.

Before you decide to refinance your mortgage with a debt consolidation loan, it might be worth seeking personalised advice 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 therefore paying more interest over time.

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Name Product Upfront consultation fee Variable rates from Comparison rates from Lenders on panel Apply Now
Finsure
$0
3.03%
3.04%
35
Finsure has a large panel of lenders and offers flexible mortgage solutions for borrowers.
Mortgage Choice
$0
3.03%
3.04%
20
Mortgage Choice's extensive broker network can help you find the right home loan.
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Which lenders offer debt consolidation options when refinancing?

It may not be possible to get a debt consolidation home loan with your current bank. Some lenders don't offer this type of home loan. Below is a cross section of lenders who do offer debt consolidation refinancing:

Remember that there is always help available, for financial and emotional distress.

How does refinancing to consolidate debt work

Refinancing to a debt consolidation loan involves reviewing your existing debts, including your 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.

You can consolidate debts like:

  • Credit cards
  • Personal overdrafts
  • Car loans
  • Personal loans

4 steps to refinancing to a debt consolidation loan

  1. 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. 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?
  2. 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.
  3. 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.
  4. 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.

6 Ways to make refinancing debt work

calculator and paperWhen looking to consolidate debt by refinancing you should look at the following:

  • 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.

When you should avoid refinancing

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. Here are some signs that you may be caught in bad debt:

  • 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.

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 across so many different debts. Her priority is to lower her monthly payments, as she can't afford them right now.

Loan account

Total amount

Monthly repayments

Mortgage

$400,000

$1,600

Credit card 1

$8,000

$250

Credit card 2

$5,500

$140

Credit card 3

$7,280

$190

Total

$420,780

$2,080

With monthly repayments of $2,080, it’s easy to see why Jenny’s having such a hard time making repayments. She approached a mortgage broker to help her find refinance to consolidate her debts. A new low interest rate loan at 2.19% p.a. was negotiated for Jenny. .

Her new situation is:

  • Jenny refinanced her debts into one home loan worth $420,780.
  • Monthly home loan repayments are now $1,595.
  • This is $5 per month reduction on her previous mortgage of $1,600, as her broker negotiated such a great interest rate.
  • This is a $485 per month reduction on her previous total monthly debt commitments of $2,080.

One thing to keep in mind is that Jenny's debts are now spread out over 30 years. This means she would be in debt for longer and eventually pay more interest over the loan term for her credit card debts, unless she starts making extra repayments towards her loan.

It's also essential that Jenny cancels her credit cards and doesn't run up new debts, or she'll end up back in the same position again.

Tips for paying off credit card debt without refinancing

  • Consider a balance transfer. This involves you transferring your debt to a new credit card which has a special low interest offer, enabling you to pay your debt off without too much of your repayments going towards interest.
  • Write up a budget. Learning exactly how much money you have to spend each week, month or year is a great way to know how much you can afford to put towards shrinking your credit card debt.
  • Pay the highest interest debt first. If you have more than one credit card, it may be useful to allocate more of your cash towards paying off the higher interest card first.
  • Pay more than the minimum repayment. Paying the minimum repayment will keep you out of trouble with your card provider, but could see your debt paid off at a snails pace - meaning you pay a huge amount of interest.
  • Put your credit card use on hold. The best way to manage your credit card debts is to stop adding to them. This means putting your card away, cutting it up, or as other more creative people have done, freezing it in a block of ice.

What should I do if my debt consolidation application is rejected?

1. Apply for a mortgage repayment arrangement

According to the National Consumer Credit Protection Act 2009, you have the right to apply for a home loan repayment arrangement if you are experiencing financial hardship. Discuss your situation with your lender to see if you can work out a repayment schedule that will better suit your servicing ability.

You may also want to think about applying for a repayment holiday to reprieve you of your mortgage repayments for a short period of time so you can focus on repaying your other debts and improving your credit history.

2. Liquidate your assets

If a debt consolidation mortgage is not a viable option, you may want to consider selling your assets – such as your home or investment property – to help manage your financial responsibilities. If you default on your repayments for a secured mortgage, your lender has the right to take repossession of your property so you may want to liquidate your assets to avoid this from occurring.

You can use our calculator to estimate the costs of selling your home.

3. Change your behaviour

If your debt consolidation refinancing application has been rejected, it may be time for a financial health check. You should ask the lender why your application was rejected so you can better understand your debt status and behaviour.

Request a copy of your credit file to see how you can build up a better credit history and rectify the situation. Make sure you pay your bills on time and develop a regular savings pattern by depositing into a savings account regularly.

You may want to speak to a financial adviser or accountant to understand how you can manage your debt more effectively in lieu of mortgage debt consolidation.

4. Reduce your existing debt

Most people decide to consolidate personal debt into their mortgage if they have recognised that they need to reduce their repayments, or if they are experiencing financial difficulty. As a result, you should be proactive about minimising your existing debt level.

Contact your credit providers, such as your credit card provider, to negotiate a new payment plan that will help you meet your repayments on time and in full.

You may also want to call your current lender or bank to see if you can negotiate your interest rate as this may ease the financial pressure of the interest portion on your home loan repayments.

5. Find a guarantor

Before you consider approaching lenders again, it’s advisable that you review your financial situation, shrink your existing debt and build your savings.

Once you’ve taken measures to improve your financial well being, you may want to consider opting for a refinancing home loan. In doing so, you can strengthen your application by finding a guarantor for the loan as this can increase your borrowing power but just make sure that you borrow within your means.

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

If you would like free financial counselling you can call the Financial Counsellors hotline on 1800 007 007. It is open from 9:30am to 4pm, Monday to Friday

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2 Responses

    Default Gravatar
    CharlieFebruary 1, 2018

    Can I borrow an extra 70000 when I refinance my mortgage ??

      Avatarfinder Customer Care
      JonathanFebruary 26, 2018Staff

      Hi Charlie, thanks for your inquiry!

      This typically depends on whether your house/ property has risen in value. If it has, you may be able to take the equity out in the form of cash when you refinance.

      Thanks,

      Jonathan

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