A debt consolidation 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, and a single, lower 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.
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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.
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
- 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?
- 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.
How does refinancing to consolidate debt work
When 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 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.
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 1800007007. It is open from 9:30am to 4pm, Monday to Friday