You can potentially consolidate almost any type of debt into your home loan, including common forms of high-interest debt like:

• Credit card balances
• Personal loans (such as for car, holidays or furniture)
• Store cards
• Overdrafts.

Some specialist lenders will even consider allowing you to consolidate any significant tax debts that you may have.

The interest rate that lenders charge is lower for home loans than for most other credit products. For example, the interest rates on credit cards can be five or six times higher than home loan rates. Lenders can charge lower rates on home loans because there is less risk associated with them, given that they have the security of a mortgage over your property.

This means that they can repossess and sell your property to recoup any amount owing to them if you default on your repayments. Many other types of credit are unsecured (and therefore riskier for the lender to provide), such as personal loans and credit cards.

If you’re continually running up high-interest credit card debt and only making your minimum monthly repayments, you’ll be charged a significant amount of interest over the long term. This is extra money that you don’t need to be paying if you can restructure your debt via a debt consolidation home loan.

Similarly, if you have one or more personal loans for significant amounts, the interest you’ll be paying on these personal loans will be more than your home loan interest rate. Again, this could cost you a significant amount over the long run.

Worse still, if you miss any of your repayments on your credit cards, personal loans or other debt, you can be charged penalty fees. Your credit rating can also be affected. If you develop a poor credit rating, it can be harder for you to obtain finance in the future. You might find that your applications are rejected, or that you must pay the lender a higher interest rate and/or additional fees to compensate for their higher risk in providing funds to you.

A debt consolidation home loan can help you to break the cycle of debt that you may be experiencing. It is a much better strategy than letting your debts overtake you. Financial stress is a leading cause of family and relationship breakdowns. In a worst-case scenario, letting your debts escalate out of control can lead to bankruptcy.

Consolidating your debts into your home loan means that you don’t have to worry about managing multiple repayments for different debts that you might have. Your other debts are repaid to your creditors and that amount is simply added to your home loan. Your direct debit home loan repayment can also be adjusted accordingly to reflect this higher level of home loan debt, but it is important to remember that the interest you’ll be charged is lower.

This single repayment restructuring can also make it easier to manage your financial affairs. You can have the security of knowing that you’ll have a single fixed repayment at the same time each month to help you budget more effectively.

A debt consolidation home loan can provide you with many potential benefits, including:

• Being charged a lower rate of interest on your consolidated debts. This gives you the opportunity you to pay those debts off quicker than you otherwise would have.
• Making your repayments more affordable.
• Improving your cash flow.
• Clearing your consolidated creditors.
• Making your repayment of the consolidated debts more convenient.
• Reducing stress by making your financial affairs easier to manage.
• Improving your credit rating.
• Protecting you from the risk of bankruptcy.

Combining all your existing debts into your home loan is a particularly effective financial strategy when all the following circumstances apply:

• Your home loan interest rate is lower than the interest rates on your other debts.
• You adjust your home loan repayments to cover the added debt. This ensures that you’re not increasing the overall term of your home loan.
• You’re committed to not getting into any further debt. If you aren’t and you’re going to keep on splurging on your credit card, only making the minimum repayments, you’ll soon be stuck in the same cycle and no better off.

If you have a redraw facility on your home loan and you’ve made additional repayments over time, you should actually be able to use that money to reduce or eliminate your other debts, instead of taking out a debt consolidation home loan.

However, if redrawing from your existing home loan isn’t an option for you, a debt consolidation home loan is certainly a potentially effective refinancing strategy to consider.

Your chances of having a debt consolidation home loan approved will improve if you can demonstrate the following to your lender:

• A good (or improved) credit rating (for example, you have made all your most recent debt repayments on time).
• A stable employment and income history. This will help you to convince your lender that you have ability to repay your consolidated higher home loan debt.
• That you haven’t ever missed repayments with your home loan lender.

If you can’t demonstrate all the above, you may need to consider applying with a specialist lender. These lenders will consider applications from people who don’t meet the standard lending criteria of the major banks, building societies and credit unions.

Specialist lenders will charge higher interest rates and/or fees to compensate them for the increased risk of the loans that they provide, but that rate is still likely to be a better option for you than the interest rates charged on other unsecured personal loans and credit card debt. 

The amount you can borrow for a debt consolidation home loan depends on three main factors:

• Your ability to satisfy your lender’s repayment criteria.
• The maximum loan-to-value ratio (LVR) that your lender is prepared to accept. An LVR ratio is the amount of your home loan expressed as a percentage of the value of your home.
• How much equity (ownership) you currently have in your home.

Let’s use an example to see how much you might be able to borrow. Imagine that you satisfy your lender’s repayment criteria and that their policy is to lend up to a maximum LVR of 90%.  If your home is currently valued at $800,000 and your current home loan debt is $560,000, you therefore have $240,000 worth of home equity (i.e. $800,000 minus $560,000). Your lender would be prepared to provide a debt consolidation home loan of up $720,000 (i.e. 90% of $800,000). You could therefore potentially consolidate up to $160,000 of other higher interest debt into your home loan (i.e. $720,000 - $560,000).

Different lenders may have lower maximum LVRs as part of their lending policies, which would reduce the maximum amount of debt that you could consolidate. The maximum LVR that lenders may be prepared to offer you can also be affected by your credit rating. Even if you don’t have enough equity to consolidate all your other debts, you can still be better off by consolidating as much as you can.

Standard rates apply to debt consolidation home loans, provided you satisfy the lender’s criteria.

Interest is the major cost of any home loan. Lenders typically advertise two loan interest rates for their products – the nominal and the comparison rate. It’s important to understand the difference between the two. The comparison rate is the nominal interest plus any associated loan fees and charges divided over a universal term and assumed loan size. It’s often referred to as the ‘true’ cost of a loan, despite the fact that your loan size and loan term will often differ substantially from those used in comparison rates.

The nominal interest rate doesn’t consider any additional loan fees and charges, so it will always be lower than the comparison interest rate. When you are comparing the cost of home loans between different lenders, make sure you therefore factor in comparison rates to your analysis as well, rather than relying solely on nominal rates.

Some lenders may charge application or set-up fees for a debt consolidation home loan. The cost of these will be included in the comparison interest rate. There may also be exit fees on any debts that you want to consolidate if they have fixed interest rates.

In addition, as with any home loan, you might be required to pay lenders mortgage insurance (LMI). Mortgage insurance protects the lender if you default on your repayments in the future. The policies of different lenders vary, but many will require you to take out mortgage insurance if your LVR exceeds 80%. The premium for this mortgage insurance is then an additional cost for you as the debt consolidation home loan borrower.

You need to weigh up these potential costs against the benefits that a debt consolidation home loan can provide. This analysis will reveal whether a debt consolidation home loan is a worthwhile strategy for you.

You may also be able to take advantage of home loan offers from other lenders to get the best deal possible. However, if you change lenders, be aware that you’re likely to be charged exit fees by your original lender.

Ideally, you should adjust your home loan repayments when you consolidate your debts so that your overall term doesn’t increase. The lower interest rate you are paying on the consolidated debts may allow you to do this. Or if you can’t do this in the short-term, set a goal to increase your home loan repayments as soon as you can.

If you do increase the term of your home loan when you consolidate your debts, you’re not making the most of your debt consolidation opportunity. While it may relieve some of your financial pressures now, you could end up paying just as much interest on your debts (if not more) over the long run. This is because you’ll take longer to pay them off, even though your home loan interest rate is lower. For example, you could end up paying off a 5-year personal loan for a car for up to 25 or 30 years instead!

A debt consolidation home loan strategy should ideally only be used once. You should aim to avoid getting yourself in the situation where you need to consolidate your high-interest debts again. You can ensure that you do this by:

• Setting yourself a budget and spending responsibly.
• Avoiding high-interest debt like credit cards or unsecured personal loans.

If you’re experiencing financial stress and falling deeper into debt, you should try and seek help. The sooner you can do this, the better. Signs that you are in financial stress include:

• Not budgeting and finding that you are running out of money, living from pay to pay.
• Avoiding your repayments on credit cards or loans. This negatively affects your credit rating, which means it will be harder for you to get loans in the future.
• Regularly waiting for final notices to pay your bills (like your phone or electricity accounts).
• Regularly being forced to borrow from family or friends to help make ends meet.

A debt counsellor will take the time to listen to your circumstances and provide advice. For example, they can analyse your spending habits in relation to your income and help you to develop a suitable budget, so that your debts won’t escalate. They might also be able to negotiate revised repayment plans with your creditors on your behalf, before your financial stress situation escalates further.

We have a lot of experience helping borrowers to gain approvals for debt consolidation home loans. It can be an appropriate strategy in certain circumstances if you remain committed to reducing your overall level of debt. If you’d like to know more or are considering a debt consolidation home loan, contact us for a no-obligation, confidential discussion of your needs and options.

We’ll take the time to understand your situation and provide advice so that you can take control of your financial future. We can also help you build a strong application if you decide that it’s the right option for you and would like to take the next step.  And just as important is our detailed knowledge of the lenders in the market. We can advise you on the right lender for your circumstances so that you’ll maximise the chances of your application being approved.