Consolidate Debt by Refinancing Your Home Loan

What is debt consolidation? 

Debt consolidation means merging different loans together into one. By combining various debts — credit cards, personal loans, home loans, store cards — you might make it a bit easier to manage your repayments.  

Consolidation can also give you greater control over your finances. Imagine only having to remember one due date instead of multiple reminders in your calendar!  

What are the different ways to consolidate debt? 

There are a few different ways. 

Some people apply for a personal loan specifically designed for debt consolidation. These loans typically have fixed interest rates and terms to make it easier to manage debt. 

Others take advantage of credit card balance transfers. They roll over the balance from their high-interest credit card debts onto a new card with a lower introductory interest rate — even as low as 0% — that goes for up to two years.

Helpful tip

Zero interest may sound great, but know what you’re signing up for before jumping in. Look out for transfer fees, sneaky revert rates (the interest that kicks in after the honeymoon period), and any fine print that could catch you off guard. A little homework now could save you a lot of money later. 

Sam Hyman

General Manager – National Sales, Aussie

You can also consolidate smaller debts into your home loan by refinancing it — keep reading to find out how. 

How does debt consolidation with a home loan work? 

If you’ve owned your home for a while and have managed to build up a decent equity in it, you might want to consider rolling other debts into your home loan. It can be a clever way to consolidate your debts because the interest rates in a home loan are likely to be lower than those in other types of loans. 

Here’s a fictional example.  

Reema is feeling the heat from the growing pile of debts on her plate. After speaking with her financial advisor, she decides to go down the path of debt consolidation.  

Prior to refinancing her home loan, this is what her debt repayments look like: 

Reema is seven years into her 30-year mortgage. Because of her property’s solid equity, with a loan to value ratio (LVR) of 65%, Reema’s lender gives the green light. 

Reema gets her credit card debt – $15,000 – added into her mortgage. She refinances her Home Loan at $265,000 for 25 years, applying the same interest rate per annum of 6.5%. 

Here’s what her new monthly mortgage repayments look like: 

After consolidating her debts, Reema has brought down her total monthly repayments to $1,790, which is $1,273.45 less than her previous monthly total.  

But the total interest payable throughout the life of her home loan has gone up significantly. 

What are the pros and cons of debt consolidation? 

There are potential benefits and risks to consolidating your debt — all depending on your personal circumstances. 

What are the pitfalls to avoid in consolidating debt? 

While debt consolidation can be a solid move for managing debt, it’s wise to keep an eye out for potential pitfalls. 

Promises that sound too rosy 

If a lending company’s advertising claim sounds too good to be true, it probably is. Be wary of lenders that promise to wipe your debt away overnight.  

A lender is typically a walking red flag if they: 

• don’t have a licence 
• avoid any discussion on repayments 
• rush you into signing blank documents with vague stipulations on costs and interest rates. 

The actual cost of refinancing 

Look at the bigger picture and consider the new interest rate and costs for refinancing. Understand all associated fees and terms.  

Combining your debts with your home loan might seem attractive at first glance but could end up costing you more in the long run. 

Risk of losing collateral 

Using your home, car, or other assets as collateral for debt consolidation exposes you to risk, especially if you suddenly find yourself in a hairy financial situation. What if you can no longer make your repayments because of changes in employment or personal circumstances?  

To avoid this, assess the implications of using collateral — and whether you have a plan B should you need to give it up — before proceeding. 

Choosing the wrong debt consolidation method 

Consider and compare various options, such as balance transfer credit cards, personal loans, or home equity loans to determine which method aligns with your financial situation and goals.   

In Reema’s case, she wants to minimise her monthly repayments so she can have more access to cash over the next year or so — at least while trying to finish her Masters in Business Administration and keep up with the rising cost of living.  

With her specific lifestyle and priorities, she’s decided that debt consolidation through a Home Loan makes more sense for liquidity, even if she has to cop a higher total interest payable over a longer loan life. 

But if she’s not taking up MBA or have any other reasons than to pay less every month, Reema can explore other alternatives. 

What are some alternatives to debt consolidation? 

If you’re not sure about consolidating your debts, there are other options available to you: 
 

• Try and negotiate a better deal or a payment plan with your existing lender.
• Ask your lender about hardship variations.
• Switch to a different Home Loan.
• Talk to your credit providers about changing repayments or extending your loan.
• Look into a credit card balance transfer. 

If you need help, you can access free financial counselling organised by non-profit organisations such as the National Debt Helpline. 

How will I know if debt consolidation is the right option? 

Your financial goals are a good place to start when weighing up whether debt consolidation is for you.  

Some see this financial strategy as a way to minimise monthly repayments. For others, a lower repayment over a longer period is a more manageable option because they prefer liquidity in their current financial situation. 

Start by crunching some numbers. Make sure you add interest rates, monthly repayments, and any fees and charges to your calculations, including any early exit fees. 

To make things easier, plug those numbers straight into one of our handy calculators such as our home loans principal and interest calculator and refinancing calculator.

Worry less about multiple debts and give yourself the gift of mental (and financial) freedom. Here at iSelect, we’ve partnered with the friendly team at Aussie to help you compare a range of different Home Loan options and start your deep dive into debt consolidation.  

Written by

Liv Steigrad

Writer

Liv Steigrad is a brand strategist and copywriter with almost a decade of experience working with words. She believes that any topic is fascinating if you look closely enough, and enjoys doing her part in making information more accessible to anyone who comes looking.

Edited by

Ellie Garran

Digital Editor, iSelect

As Digital Editor, Ellie is passionate about making our web content clear and simple to save iSelect customers time and effort. They also love knitting and sewing, especially with recycled materials, so you’ll probably find them in the iSelect office wearing a dress made out of a sheet.

Reviewed by

Sam Hyman

General Manager – National Sales, Aussie

Sam Hyman is General Manager – National Sales at Aussie, where he leads national sales performance and growth across multiple channels.