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Should you Consolidate Debts into Your Mortgage?

22nd Feb, 2020 | Loan Features, Refinance

In this article:
When deciding whether to consolidate your debt into your home loan, a crucial question is “Can I make extra repayments to pay off the loan sooner?

When deciding whether to consolidate your debts with a home loan, there is one vital question to ask yourself and your lender. “Can I make extra repayments to pay off the loan sooner?”

This question is crucial because it determines your ultimate interest bill. The longer you take to pay off a debt consolidation loan, the more your debt will cost you in the end. 

How debt consolidation works

You might have several loans and debts like a car and personal loan, credit and store cards. With each of these come different interest rates, perhaps with account fees and other charges.

Debt consolidation is when you combine these outstanding debts into one loan – with one low-interest rate and one set of account fees. You can choose to set the loan up to take advantage of your existing mortgage features like redraw or line of credit. Or, you can refinance the entire home loan to borrow a larger amount. 

Combining multiple high-interest rate debts into a single low-interest loan typically means that your monthly repayments will significantly reduce.

Why use mortgage debt consolidation?

There’s no doubt it can be simpler to sort out your finances when you have a clear picture of your debt. With a single loan to repay, rather than juggling different repayments to numerous lenders, it’s easier to keep an eye on the size and shape of your debt. 

With fewer debts to manage and less chance of accidentally missing a payment, this might give you the confidence you need to take control. 

You also have the advantage of a single point of contact with a lender should you start to experience financial hardship.

What to be wary of when consolidating debt

Learn how much you can save through refinancing.

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The key to making debt consolidation work is to continue paying as much as possible off the balance of the loan each month.
The key to making debt consolidation work is to continue paying as much as possible off the balance of the loan each month. 
 
By keeping the consolidated payment amount at a similar level to the sum of your previous multiple debt payments, the debt will reduce more quickly. Do this by taking out a shorter loan term when establishing the loan or making extra repayments. Your lender may even allow you to split the consolidated debt from your home loan into a separate account. It will be under the same interest rate, but it will be easier for you to see that you’re paying down your total debt.
Not doing this, and you risk paying more over the long term. When you consider that you’re stretching your short-term debts over an extended period, it makes sense that the interest will continue adding up.
 
Here’s what else to consider:
  • Factor in fees when you’re calculating whether debt consolidation will save you money. Include the fees of exiting your other loans early and the fees associated with the new loan.
  • You want to be sure these costs don’t make it more expensive to pay off the debt this way rather than maintaining your existing multiple debt repayments.
  • Not all lenders offer debt consolidation loans. You may find it hard to get one if you don’t have a good credit rating.
  • Be sure your new loan allows you to make extra repayments, as well as repay the loan early without penalties.
  • Consolidating debt into your mortgage requires equity. Most lenders will increase your loan to 80% of the value of the property, but above this, you may have to pay Lenders Mortgage Insurance.
Speak to your Yellow Brick Road mortgage broker about what options might be available for debt consolidation.