What is a debt consolidation home loan – and how can it help you manage your debts?

There are many reasons we might find ourselves in debt, and not all of them are necessarily for negative reasons. Perhaps you’ve taken out a loan to fund a new business, or a credit card for emergencies. However, if you’ve found yourself paying off multiple debts at once, it can quickly become stressful and difficult to manage. Not only that, but it can end up costing you more, and getting you into even more debt.

If you’re looking to buy a home (or already have one) but are already juggling a few debts, a debt consolidation home loan might be helpful to keep your head above water. That said, they’re not for everyone. Here, we answer the question “what is a debt consolidation home loan”, as well as how to get one and the pros and cons.

What is a debt consolidation home loan?

A debt consolidation home loan is when you package all of your existing debts such as a credit card or personal loan under your mortgage.  This allows you to pay off these debts with one simple weekly, monthly or fortnightly payment (rather than multiple) at a single, lower interest rate. If you currently have multiple lenders, these would also be brought under the same company. You can consolidate debts like your credit cards, personal overdrafts, car loans, personal loans and home loans.

Why would I consolidate my debts?

Generally, home loan interest rates are lower than other types of finance such as personal loans. So, if all of your debt is rolled into a single home loan, you could potentially be paying less in interest each month.

Many people choose to consolidate for the increased ease, simplicity and convenience of repayments. Here’s a breakdown of the reasons you might choose to consolidate your outstanding debts under your home loan.

It’s easier to repay

One of the biggest potential benefits to consolidating debt into a mortgage is to only have one repayment to keep track of, which could make your finances simpler. The last thing you want to do is miss a debt repayment, potentially leaving you in financial hot water. A debt consolidation home loan makes it easier to meet your debt obligations on time, as you’re only making one simple payment rather than multiple.

It gives you a clearer idea of your financial future

Paying off multiple debts at the same time can quickly become messy. You can lose track of how much interest you’re paying and how long your loan terms are. Consolidating your loan gives you a clearer picture of when you’ll be debt-free, which can be highly motivating.

It can improve your cashflow

Consolidating your debts under your home loan can also improve your cashflow and budgeting. As you’ll only have one payment coming out at the same time each month, it makes it far simpler to manage your money.

It can give you a lower interest rate

Generally, home loan interest rates are far lower than those charged on credit cards or personal loans. Currently the average variable home loan interest rate in Australia is 4.63% but you can find them as low as 2%. Meanwhile, the lowest you’d be looking at for a credit card would be around 11%, but then often skyrocket higher than 20%.

Some of your interest rates might be monthly while others are annual, which can become difficult to manage too. So, in rolling all of your debts into one interest rate, you’ll likely be saving yourself plenty of money and headaches.

What factors should I consider when consolidating debt?

You may be wondering ‘is it a good idea to consolidate my debt?’ While many people find it helpful in helping them regain clarity and control over their finances, there’s no one right answer to that question. It depends on your unique personal financial situation. Here are some factors to consider to help you determine whether a home loan consolidation debt is the right choice for you:

Longer terms

It’s important to be aware that home loans normally have longer terms than other types of debt like credit cards or personal loans. So, while the lower interest rate may seem appealing, it can potentially end up costing you more compounded debt if your mortgage is stretched out over 20 to 30 years. Be sure to weigh up the costs vs savings to see if it’s worth it.

Interest rates

As with any home loan, you will need to decide whether you would prefer a fixed (the repayments won’t change) or variable (subject to change and will allow you to make extra repayments) on your debt consolidation home loan.

Fees

Many home loans charge annual or service fees, which can add up and potentially outweigh the amount you’d save. You may also need to pay an exit fee to your current fee, as well as stamp duty and other government fees on your home loan.

Lender’s mortgage insurance (LMI)

Depending on your situation, you might still be liable for Lenders Mortgage Insurance. Generally, Lenders Mortgage Insurance is not transferable, so if your loan to value ratio is still more than 80% of the value of your property, you would likely need to pay it again. It might also be worth looking into a loan guarantor (such as a parent) if this is the case, to help you avoid LMI costs.

Break and set-up fees

Those who are refinancing also might be liable for a variety of fees. For example, your current home loan might carry a closing or discharge fee. Those with fixed rate loans might also need to pay a break fee. Then, the new lender may also charge a set-up fee to take care of the application paperwork. All these fees depend on your circumstances, so it’s best to look through your fine print and to talk to your lender to see what you could be up for. In some cases, despite all the fees it can still be worth refinancing.

It’s best to work with an experienced broker to help you weigh ups the costs and advantages and determine whether refinancing your home loan is the best option for you.

When should you avoid refinancing your home loan?

There are a few scenarios where it may be best to avoid consolidating your debts into your home loan

• If you have more than three different types of loans, including unpaid bills

• When it will cost you more in compounded debt or fees

• If you don’t make your current debt repayments on time

• If you’re borrowing money from one source to another

• If you’re only doing it so you can take out another loan

• If you do not have the cashflow to make larger repayments

• When you have a poor credit score and will likely be rejected on a home loan

If any of these scenarios sound like you, you may want to consider seeking financial counselling with a professional who will be able to help you find another solution to your financial difficulties

If you already have a home loan and are ahead with your mortgage repayments, you may also choose to instead redraw against your mortgage instead of consolidating debts. This can save you money and can help reduce the term of your loan.

How do I refinance to consolidate my existing debt?

If you already have an existing home loan and want to consolidate your debts, you will need to refinance to a debt consolidation home loan. This is ending your current mortgage and moving to a new one, sometimes with a new bank. There are multiple steps involved in refinancing a debt consolidation loan.

1. Firstly, it’s important to look at the factors above and determine that consolidating your debts is definitely suitable for your financial situation, lifestyle and individual needs.

2. If you decide it’s the right choice for you, it’s time to speak to your current home loan provider. Not all lenders offer debt consolidate home loans, but it’s worth seeing if you can refinance with them and if so, what the interest rate will be. If you are able to refinance with the same lender, the transition will likely be smoother and you won’t have to pay things like exit fees

3. If you do need to switch to another lender, the next step is to work with an experienced mortgage broker who will be able to help you compare the hundreds of home loan products on the market and find the one that best suits your borrow needs

4. Once you find one that’s suitable, be sure to calculate the exact costs of refinancing and ensure it’s definitely going to save you money in the long-run.

5. Once you find your new debt consolidation home loan, you will need to exit from your existing lender and apply with a new one. You can check out our guide to refinancing your home loan for more information on this process. You will also need to contact your other lenders, for example credit card or personal loan provider, to transfer your existing balance

How does debt consolidation affect my credit score?

According to ASIC MoneySmart, consolidating multiple loans can actually help you improve your credit score. It can help ensure you make all your repayments on time, and fulfill your debt obligations more quickly.

However, it’s important to be aware that every time you apply for a new credit provider, a credit enquiry is added to your score. Applying to multiple credit providers in a short space of time can negatively impact your credit score and a debt consolidation home loan. So, it’s crucial to keep this in mind when refinancing your mortgage.

Can I consolidate debt into an existing first-time home loan?

Yes, it is possible for first time home buyers to consolidate their existing debt into their home loan – but they will have to use a guarantor. This is someone like your parents who provide a guarantee on your home loan, by securing it against their property. Doing this would allow you to borrow 110% of your home loan – 100% of the property value, 5% of the purchase costs and up to 5% in debt. However, going down this route would depend on whether your parents own their own property and how much equity they have available in it.

For many people, consolidating their debts into a single home allow helps simply their finances and makes your repayments more manageable. However, just like any big financial decision, it requires careful consideration. It’s important to weigh up your options and crunch the numbers, to ensure it’s definitely going to save you money down the track. Working with a trusted mortgage broker can assist with making the process and as streamlined and stress-free as possible.