Kathryn Lee - 17 Jun, 2020
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.
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.
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.
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.
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.
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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:
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.
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.
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.
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.
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.
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There are a few scenarios where it may be best to avoid consolidating your debts into your 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.
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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.
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.
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Words by Emma Norris
If you’re ready to refinance to consolidate debt into your home loan, get cash out or reduce your current interest rate, here’s how you get started online:
Step 1. Click on the button below to go to our web form.
Step 2. After answering a few questions, we’ll provide you with a free refinancing comparison report to show how much you can potentially save, and one of our experienced mortgage experts will give you a call back to assist.
eChoice is here to help you through the entire home loan process and assist with all the paperwork to make sure you get the right home loan!