Refinancing your mortgage to a debt consolidation loan has drawbacks. Make sure you know your rights and responsibilities so you can manage your finances successfully
A mortgage refinance is often used to consolidate credit card and personal loan debts. It is seen as an attractive strategy because a home loan is normally offered at a much lower interest rate-- such as an average variable rate of 4.5%-- compared to an interest rate of around 14.5% for personal loan debt.
If you refinance to a debt consolidation mortgage, you can reap the benefits of lower interest and the ease of managing one combined payment. However, there are some risks that you need to be aware of in order to remain in control of your finances.
As a borrower, you have several rights when you refinance to a debt consolidation mortgage such as the right to negotiate and file a formal complaint, the right to free legal and financial counselling and the right to receive adequate notice in the event that your lender intends to take legal action against you.
Know your rights when you refinance to a debt consolidation mortgage to ensure that your lender and broker acts ethically and responsibly.
What should I look for in my debt consolidation home loan contract?
Lenders are required by law to provide you with documents that outline your rights and responsibilities, the home loan contract and the comparison rate schedule.
If any section of your refinancing debt consolidation home loan contract is unclear, you should ask your broker or lender to explain it to you. You should also use the following checklist to make sure that all relevant terms are included in the contract:
- Details about the lender’s license with ASIC
- Total amount of borrowed funds
- Total amount to be repaid including interest charges
- Loan term
- Calculations and adjustments made on interest rates
- Whether or not the debt consolidation home loan is secured
- Whether or not mortgage guarantee insurance is required
- All fees and charges associated with the home loan
- How often you will be given an account statement
- Repayment frequency
Learn more about your rights and responsibilities when refinancing a home loan.
Statistics about debt consolidation
$4,300 - the amount of debt the average Australian has on their credit card
$700 - the amount of interest the average cardholder pays each year
What rights should I be aware of when refinancing for debt consolidation?
- Negotiation and complaints. Under 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. If this is the case, you should speak with your lender to see if you can apply for a hardship variation (as outlined in section 72 of the National Consumer Credit Code). An option you may want to consider is whether or not you can apply for a repayment holiday (for a mortgage). When you apply for a hardship variation, your lender or bank is legally obliged to respond within 21 days to notify you of the outcome of your application. If you are not satisfied with the outcome, you can lodge a dispute with the Financial Ombudsman Service (FOS).
- Choice of provider. When you refinance your home loan, you have the right to choose your new home loan provider. You shouldn’t be pressured or intimidated by sales representatives from a bank- you have the right to refuse them.
- Notice from your lender. Your lender or bank must provide you with a default notice that gives you a minimum of 30 days to repay any missed payments. This must be provided to you before they take legal action.
- Financial counselling. The Australian Securities and Investments Commission (ASIC) provides an online financial counselling service to borrowers in distress. You can also use the free Debt Self Help Online Assessment Tool to get a customised review of your debt status.
- Free legal advice. If you need legal advice but you cannot afford to consult a solicitor, you have the right to use community legal centres, legal aid and consumer credit legal services.
- Repossession of property. Certain procedures must be adhered to if your home is to be repossessed by your lender. If you default on your repayments, then the lender should send you a default notice with at least 30 days to fix the default. If the default and normal repayment are paid, then the contract will proceed as normal and the lender cannot take legal action. However, if the repayment is not paid within this time period, the lender can make the whole loan repayable and repossess your home to recover the debt. If this happens, the lender must provide you with a statement of claim or summons served on you for the arrears and/or the loan debt and/or the repossession of your property. If you need further information regarding your rights in this situation, you can contact a solicitor or visit the Legal Aid government website.
- Licensed operators. Make sure that your lender or any broker that helps you is licensed by ASIC. If the lender or credit provider is not licensed (or are not a representative of a company that is licensed), then they are operating illegally in Australia and you have the right to enquire about their status. You can check to see if the operator is licensed by searching ASIC’s Professional Registers online.
Compare refinancing home loans
How can I ensure that my rights are upheld when I refinance?
When you apply for a debt consolidation mortgage refinance, ensure that:
- The lender or broker is licensed by ASIC
- The lender or broker fully informs you of all the product details and fees and provides all the required documentation
- Your repayments have been reduced, not increased
- You have gained control over your debts and will benefit financially from the refinance
- You have avoided companies that make unrealistic debt-free claims or those companies that engage in equity stripping practices