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Refinancing for debt consolidation


Mark Bristow

Mark Bristow


If you already have a home loan, and also owe money on credit cards, personal loans or car loans, you may be (figuratively) drowning in debt. Juggling the repayments on multiple loans can prove challenging at the best of times, and if your financial circumstances were to change suddenly, such as from job loss or a prolonged illness, you could find yourself at real risk of defaulting on one or more of these debts.

One option that may be worth considering is to refinance your mortgage, consolidating your debts as you do so. By combining your smaller debts and adding them onto your home loan, you may be able to better organise your finances and enjoy more affordable monthly repayments.

Can refinancing to consolidate debt simplify your finances?

Juggling the repayment schedules for multiple debts can be time-consuming and exhausting, even for well-organised and budget-conscious borrowers. And if any of these lenders charge variable interest rates, some (but not all) of your repayments could rise or fall from month to month, further complicating your budget.

By consolidating your debts when you refinance your mortgage, you’ll end up with just the one ongoing repayment to manage per month, massively simplifying your finances. Even if your variable interest rate was to rise or fall, it should be relatively simple to budget for with just the one repayment to consider.  

Can refinancing to consolidate debt save you money?

paying off home loan

Short answer: Refinancing for debt consolidation may reduce your monthly repayment totals, which can help to relieve some of your short-term financial pressure. But by paying off relatively small debts over a longer period of time, you may ultimately pay much more in interest charges over the full term of the loan.

Longer answer: Here goes!    

When you add up the principal and interest costs of making separate repayments on your various personal loans, credit cards and other debts, the combined monthly total can be surprisingly high.

By refinancing your mortgage and consolidating your smaller debts into it, you’ll only need to make the one repayment per month. You’ll also only be charged interest the once, most likely at a significantly lower rate than what might have been charged on your other debts. This can drop the monthly cost of your debts significantly, making them more affordable from month to month.

However, while consolidating your debts into a refinanced mortgage can help to relieve some of your financial pressure in the short term by minimising your monthly repayments, this doesn’t mean that refinancing for debt consolidation is a cheaper option in the long run than paying off your smaller debts separately.

This is because while home loans tend to have lower interest rates than personal loans or credit cards, their loan terms are typically much longer, with 25 or 30 years being common. This means that a borrower may ultimately pay significantly more in total interest over the lifetime of the loan than if they’d paid off their credit card debts and personal loans separately.

Consider this example (totals and interest rates are examples only and not indicative of current market rates):

Before debt consolidation:

Type of loan Loan amount Interest rate Loan period Monthly repayments Total interest Total cost of loan
Home loan $600,000 5% 30 years $3221 $559,535 $1,159,535
Personal loan $10,000 9% 3 years $318 $1448 $11,448
Car loan $30,000 9% 5 years $623 $7,365 $37,365
TOTALS $640,000 $4162 $568,348 $1,208,348

After debt consolidation

Type of loan Loan amount Interest rate Loan period Monthly repayments Total interest Total cost of loan
Home loan (refinanced with debt consolidation) $640,000 5% 30 years $3436 $596,836 $1,236,836
TOTAL SAVINGS $726 -$28,488 -$28,488

There are options available to help you minimise the total amount of interest you pay when you refinance a mortgage for debt consolidation. One is to find out if your lender will allow you to “split” the balance of your home loan.

Unlike a split rate home loan (where you pay a fixed interest rate on a percentage of your loan and a variable rate on the remaining balance), this arrangement involves splitting the balance of your mortgage, so that the amount owing on your home is separated from the amount owing on your consolidated debts, with the same interest rate applying to both. This can allow you to pay extra onto your consolidated debts and get this balance paid off faster, thus helping to minimise the total interest you’ll pay over the lifetime of the loan.

Other debt consolidation dangers to watch out for:

Businesswomen Managing account familand expenditurey finances for income

  • Beware of break costs – Find out whether you will be charged any fees from your existing or future lender for consolidating your debts into a refinanced mortgage, and confirm whether you’ll be able to afford them comfortably. One possible option is to consolidate these break costs into your mortgage along with your other debts, though this would mean paying interest on them for the full term of the loan, ultimately costing you more in total.
  • Try not to fall back into debt – It may take some heroic willpower, but once you’ve consolidated your existing debts into a refinanced home loan, don’t use this as an excuse to max out your credit cards again!
  • Consider the ongoing fees – Refinancing is a lot like taking out a brand-new home loan, and many lenders charge fees as well as interest on their mortgages, which can sometimes make them less affordable than you first thought. It’s worth checking your lender’s Comparison Rate to get a more accurate estimation of your refinanced loan’s approximate cost, including interest and standard fees and charges.   

How to refinance for debt consolidation

Approved Debt Consolidation Loan Application Form with pen, calc

Ultimately, your choice of whether you choose to consolidate your debts by refinancing your home loan comes down to deciding whether the more affordable monthly repayments are ultimately worth paying more money in total interest in the long term. Before making any decisions, it’s important to seek independent advice from a financial adviser, who can take your unique financial situation into account.

Once you’ve looked at the current cost of paying off your debts, compared to the ongoing costs of consolidating those debts into a refinanced mortgage, and are satisfied with how much you’d be paying back over the full term of the loan, it’s time to take the next step.

It’s often worth checking with your existing mortgage provider to see if they’d be willing to refinance your loan, though not all lenders offer a debt consolidation option. Comparing other lenders with the help of RateCity can give you a wider array of refinancing options to consider, increasing the likelihood of ultimately consolidating your debts into a single, easy to manage mortgage with an affordable interest rate.

Example home loans for refinancing

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