Consolidating debt into your home loan with a debt consolidation loan

If you have an existing home loan, an option could be to transfer your debt onto your mortgage with a debt consolidation loan or applying to increase your existing home loan.

Potential advantages of this method are:

• Home loans typically have a lower interest rate compared to other lending options like personal loans and credit cards.
• Depending on your circumstances, you may be able to switch to a home loan with a lower interest rate than your current loan.

Potential disadvantages are:

• Home loans have a longer loan term, which means you may pay more in interest over time.
• Your mortgage repayments may increase, which could make it more difficult for you to make your repayments on time and meet your day-to-day living expenses. Alternatively, if you decide to keep your repayments the same and increase your loan term, you could end up paying more in interest.
• If you can’t make your repayments, you could risk losing your home.

How do debt consolidation products stack up?

Canstar has compare the cost of a personal loan, a credit card with a balance transfer offer and a home loan to see which option could work out the cheapest. In this hypothetical example, they have looked at the total amount of interest paid on a $10,000 debt repaid over three years. This is based on the average interest rates for these products on Canstar’s database at the time of writing. Be aware this example does not consider any fees that may apply, and it assumes the borrower’s credit application is successful for whichever option they choose.

Debt consolidation optionsProductAverage Interest RateMonthly RepaymentTotal Interest PaidPersonal Loans12.12%$333$1,978Credit Cards with a 0% Balance Transfer Offer for 14 months18.96%$308$1,090Home Loans3.30%$292$517Source: canstar.com.au – 20/01/2021. Average personal loan rate based on the mid-rate (middle point between the maximum and minimum rate on Canstar’s database for that product, where applicable) for unsecured personal loans available for a term of 3 years. Average credit card rate based on the average balance transfer revert rate (applied after the balance transfer offer period) for non-reward personal unsecured credit cards. Average rate for home loans based on variable owner-occupier loans on the database for a loan of $400,000 at 80% LVR, excluding first home buyer-only loans and loans with introductory periods. 0% balance transfer period based on the average term for cards with 0% balance transfer offers, rounded to the nearest whole number of months. Monthly repayment and total interest paid for the home loan scenario are calculated on the $10,000 portion only, for comparison purposes. Repayment calculations assume monthly principal and interest repayments over 3 years. The above calculations do not consider the impact of any fees.

Their hypothetical consumer would be paying the least amount of interest by using the home loan consolidation strategy and the most by taking out a personal loan. However, this assumes the borrower is able to pay off their debt within the three-year period and not incur any new debts. In this scenario, the borrower also does not repay their credit card balance in full within the promotional period.

Aside from cost, you should also consider your spending habits and whether you will be able to repay your debts on time when thinking about which strategy may work best for you. Make sure you weigh up your options carefully and have a repayment strategy in place.

It can also be a good idea to cancel any credit cards you have consolidated, after checking whether any exit fees apply. This means you won’t have to pay any annual fees on the cards and help reduce the risk of potentially accumulating more debt.

Ray Ethell offers a wealth of experience to his clients, gained from over 20 years in the Finance industry, and prides himself on providing reliable customer focused service.