Refinance Your Home Loan for Debt Consolidation

Nowadays it is very common to have different loans (car loans, personal loans, credit cards, etc.) and people with multiple debts on them can get the benefits from debt consolidation with their existing home loan as it helps to reduce the overall interest burden. 

It is highly recommended to review an existing mortgage regularly because you may get better interest rates or deals now as compared to when you first took the loan. Also, you will save a lot of money over the long term because you can consolidate high interest rate debts like credit cards, car loans, etc. with your home loan. Home loans generally have a lower interest rate. 

Read further to know how to refinance your mortgage for debt consolidation, what kind of debts you can consolidate, how to do it, and its various benefits and drawbacks.

Understanding Debt Consolidation Home Loans

Debt consolidation loans are a special type in which your lender will let you combine some or all of your personal debts into your existing home loan and refinance it into one lot at a potentially lower interest rate. For example, if you have a car loan of $50,000 with a rate of 8% p.a. and a home loan of $200,000, you might consider to consolidate a car loan with your existing home loan. In that case a new consolidated loan will be $250,000.

Home loans’ interest rates are quite low and debt consolidation will help you to save money as car loans and other unsecured loans have a higher rate compared to home loans. Some loan providers will consider the additional debt as a separate split and let you make separate repayments for it. 

 You will just need to make one repayment each month for the entire loan sum. 

Most unsecured debts like credit cards, car loans, etc., generally have a higher interest rate than a home loan. So, refinancing these debts into your home loan will substantially reduce the amount of interest you pay over the loan term. You will save a lot of money on interest and pay the debt off comfortably over a longer term.

If you add all the debts that you want to consolidate to an existing home loan, then the total sum will be your new debt. Use our equity calculator to check  your new monthly repayments and total interest charges. 

Common Debts that People Consolidate into Home Loans

There are a variety of different debts and loans that you can consider consolidating while refinancing your home loan. Some of them are as follows:

Credit cards or utility store cards: Most commonly, people consolidate credit card bills and dues as they have a really high interest rate. They also consolidate utility store card bills and similar dues.

Car loans: Most car loans have a term of 1 to 5 years, and you can combine it with your home loan.

Personal loans: Most personal loans are unsecured and come with a high interest rate. So, people consolidate it with home loans to save interest money. 

Personal credit accounts: Some loan providers allow you to consolidate private credit like utility bills of your TV, phone, electricity, water, etc. 

It is always better to speak to your lender and confirm the types of debts that you can consolidate. All lenders have specific rules and requirements that you will have to follow.

What to Consider while Consolidating Debts to your Home Loan?

If you experience financial difficulties and having trouble managing several debts, then debt consolidation can be a good option for you. You could get a lower interest rate and save money through this too. However, you need to consider the costs involved with it like refinancing fees, legal fees, early loan payment penalty, etc. 

Debt consolidation is recommended only if the savings outweigh the costs. Follow these steps to make sure it will help you financially:

• Check home equity: Evaluate your home’s current value and calculate your home equity. It will help in checking eligibility and ensuring you can pay off the newly increased loan without issues. 

• Calculate savings: Use a home loan calculator to ensure that your new repayment after debt consolidation will be lower than the new monthly repayment. 

Debt consolidation refinancing involves a lot of things and a complex process. At NG Loans, our home loan specialists will break down the entire process for you and help you make the best decision. 

Documents Needed to be Eligible for Debt Consolidation

You will have to provide the following documents to your loan provider:

• Your existing home loan’s statements for the previous 6 months
• Most recent two or three months’ payslips
• Most recent statements of other debts 
• A copy of your council rate notice and/or notice from body corporate
• Identity verification documents, such Australian driver license and medicare card

How to Get Approved for Debt Consolidation?

You need to prove to your lender that your financial situation is fine and you are trustworthy. You must have the following:

• Good credit score
• Evidence that you make loan repayments on time
• Evidence of credit card bill repayment and other dues
• Stable employment history
• Sufficient home equity

Have a discussion with our expert team for advice on maintaining a good credit score and avoiding bad credit history.

Pros and Cons of Debt Consolidation Refinancing

Pros of debt consolidation:

• You can save money and improve your financial situation by combining your debts at a lower interest rate. 

• Better management of dues like credit card bills, car loans, utility bills, personal loans etc.

• Instead of dealing with multiple lenders for different debts, you can focus on a single loan and one monthly repayment. 

• Some unsecured debts have a short term, and by consolidating it with your home loan, you can pay it off over a longer term. 

Cons of debt consolidation:

• Once you consolidate all your debts into the home loan, your monthly loan repayment will get a lot higher. 

• You will have to pay a break fee for the existing loan if it has been fixed and application fees for debt consolidation refinancing. The costs involved may outweigh the savings. 

• When you have to pay more after debt consolidation, you may take more time to finish off the debt.

Every person has a unique situation, and this needs to be considered while refinancing. For some, debt consolidation might be great, while some may accrue losses because of it. 

Summing Up

Most unsecured debts have a high interest rate, and debt consolidation refinancing is a great way to ensure lower rates and savings over the long term. In addition, the stress of dealing with multiple lenders can be eliminated, and you can focus on one consolidated home loan.

We read about the various types of debts you can consolidate and the process involved. Consider potential costs and calculate your savings before finalizing debt consolidation. 

You can book an appointment with our loan experts at NG Loans for any help you need. We will guide you through every step of refinancing and make sure that debt consolidation is beneficial for you.