What you need to do to roll debt into your home loan
If you have a home loan as well as short-term debt such as a personal loan or credit card, staying on top of your repayments can be challenging. If you’re struggling to meet your repayments, you may be able to benefit from refinancing your home loan and combining all your other debts into your mortgage.
If structured correctly, you could end up paying less interest and having fewer loan fees to service, along with the convenience of one monthly repayment instead of several separate repayments.
Before you decide whether refinancing for debt consolidation is the right option for you, it’s important that you consider your financial needs closely with the help of an accountant or mortgage broker.
If you think refinancing for debt consolidation could be a viable option for you, review our step-by-step guide below.
Step-by-step guide to refinancing for debt consolidation
- Negotiate a better interest rate with your current lender. The vast majority of Australians simply accept the deal offered to them by their bank when they could easily negotiate better terms. Phone your lender and ask for a better interest rate. It’s a lot easier for a lender to keep existing customers than to attract new ones, so it’s usually worth their while to keep you happy. Before calling your bank, do some research to see what sort of interest rates your lender is offering to new customers, as well as how the rate you are receiving compares to other products on the market. Once you know what’s available, you can make a reasoned argument for a better deal. Even a 0.25% p.a. interest rate drop on your loan can save you a lot of money in the long term.
- Consider alternative options to debt consolidation. Debt consolidation carries a degree of risk, so it’s worth considering a range of other options. As well as asking for a better interest rate from your current lender, you may be able to benefit from lower fees or extra features (such as an offset account) on your current loan. Another suitable course of action could be to sell your home, or maybe even sell your second car in order to free up extra cash.
- Understand your borrowing capacity and budget. If you want to make an informed choice about the best course of action, take a closer look at your financial situation. Calculate your average monthly income, your debts and ongoing expenses and any assets you own. Will debt consolidation be a wise financial choice for you and lead to significant savings? Remember that you’ll need to take into account the cost of refinancing (loan discharge fees and break fees for your current loans, plus application and legal fees for the new loan) to work out whether it will counteract any potential benefits.
- Get help from professionals. Home loans, refinancing and debt consolidation can be difficult to understand if you don’t have specialist knowledge, so don’t be afraid to ask an expert for help. A financial planner will examine your overall financial situation and help you develop a plan to bring your debt under control. If you’d like assistance with deciding on the right home loan for your needs, a mortgage broker will assess your situation and present you with a choice of suitable loans. Brokers have a duty of care to match you with a mortgage that suits your requirements.
- Compare different debt consolidation home loans. Shop around for a loan that offers the best deal for you. Consider the interest rate you will receive, any fees and charges that apply, and how much your regular repayment amounts will be. You can also look at the features a loan offers, such as offset accounts, as well as flexible inclusions, like the ability to make additional repayments without being penalised.
Traps to avoid when refinancing for debt consolidation
Keep an eye out for the following pitfalls when refinancing your home loan and consolidating your debt:
- Failing to consider the costs. Refinancing your home loan costs money; you will most likely incur fees from exiting your old loans and also from setting up your new loan. Make sure you factor these costs into your calculations to determine whether refinancing will be worthwhile.
- Not checking the loan term. Make sure you consider the term of your new loan as this can affect the affordability of refinancing. Paying off smaller debts over a longer period can result in you paying more in interest and fees over the course of the loan.
- Dodgy providers. Unfortunately, there are some unscrupulous providers in the industry that take advantage of consumers in financially desperate situations. They charge high fees and establish loans that you are highly unlikely to be able to afford to repay. Avoid these operators at all costs.
- Digging a deeper hole. Don’t make the mistake of thinking that you can borrow more money now that you’ve consolidated all your other debts. Running up another big credit card debt is only going to get you into an even deeper financial hole, so make sure you don’t get yourself into further trouble.
- Having your home seized. Combining unsecured personal loan and credit card debts together with your home loan is risky. The home loan will most likely be secured with your property, so you could lose your home if you fail to repay the new loan.
- Not comparing your options. If you want to find the best loan for your needs, you need to compare a range of options. This will give you an idea of the features and fees associated with a variety of loans and help you determine which lenders are offering value for money.
The benefits of refinancing for debt consolidation
In Australia’s competitive home loan market, it pays to regularly review your home loan options and see if you’re getting the best possible deal. As interest rates fluctuate and mortgages with new and flexible features become available all the time, comparing your current loan with those offered by your bank and other lenders will give you an idea of whether you’re getting value for money.
By consolidating multiple debts into the one loan, you can minimise the amount of interest you need to pay on the money you owe as well as reduce ongoing loan fees.
Refinancing for debt consolidation also has the added benefit of combining all your separate repayments into one single monthly repayment. This makes it easier to manage your debt, make repayments on time and develop a reliable budget for the future.
For example, say you owe money on a car loan, two credit cards and your home loan – that’s four monthly repayments to take care of, and each debt accumulates a different level of interest. Then there’s ongoing fees to pay on the car loan and home loan, plus an annual fee to pay on each of the credit cards. Refinancing your home loan could allow you to consolidate all your debts into one loan, potentially saving you money while simplifying your debt repayments.