Can you consolidate personal loan debt on your home loan?

Personal loan interest rates tend to be higher than home loan rates, so you might wonder whether consolidation could be the key to spending less on interest charges.

If you’re paying off a personal loan alongside your mortgage (and perhaps even other kinds of credit like a credit card or a car loan), there may be times when it feels challenging to manage.

This could be due to the fact that each credit product likely has different repayment amounts, due dates, fees and interest rates.

So, given home loans tend to offer the lowest interest rates, is it possible to consolidate personal loan debt on your home loan to simplify your repayments and save on interest?

While it is technically possible to do so by refinancing your home loan, it’s important to first weigh up the potential risks and benefits.

Benefits of consolidating your personal loan debt on your home loan

• Opportunity to save on interest charges

You could potentially save money on interest charges – but only if you pay off your personal loan debt within the original timeframe.

For example, if your personal loan had three years remaining on its loan term, you’d need to continue to pay down the debt within three years after consolidating in order to genuinely save money on total interest charges.

This would likely mean making extra repayments on top of your new mortgage repayments for the duration of the original personal loan term.

• Simplified repayment process

Consolidating multiple credit products into one single debt can help make your repayments more manageable. Instead of having multiple repayments due on different dates, you’ll only have one to worry about. This may also help minimise your risk of missed payments and being stung by late payment fees.  

• More affordable repayments

With lower interest charges and fewer fees payable, you could be looking at more affordable repayments – even when sticking to paying down your personal loan debt within its original loan term. This could give you more breathing room in your budget.

Risks of consolidating your personal loan debt on your home loan

• Pay more in total interest charges

Arguably one of the biggest risks of consolidating your personal loan debt on your home loan is the potential to pay more money in interest over the life of the loan. This is possible because personal loan terms are typically around three to five years long, whereas home loan terms can be 25 to 30 years long.

If, for example, you are five years into your 25-year home loan term, you still have 20 years remaining. So, if you refinance to another 20-year mortgage to consolidate and neglect to repay the full personal loan debt within its original repayment timeframe, you will essentially be paying it off over 20 years – interest and all.

• Get hit by unexpected fees

Depending on the type of personal loan you have, you could be hit with early repayment and exit fees if you terminate the loan in order to consolidate. Be sure to check what kinds of fees may be payable and factor these into your calculations when determining how much you could genuinely save by consolidating.

What alternatives are there?

If you think the risks of consolidating your personal loan debt on your home loan outweigh the benefits, or you simply want to weigh up all your options before you decide on your next move, it might be worth considering these alternatives:

• Debt consolidation personal loan

If you have multiple forms of credit in addition to your home loan, you could consider combining these while leaving your home loan separate. A debt consolidation personal loan allows you to consolidate credit products such as other personal loans, car loans, and credit cards into one single personal loan.

Opting for this alternative could allow you to simplify your debt repayments, and limit money spent on interest and ongoing fees, while avoiding some of the risks posed by consolidating on your home loan. Keep in mind that a debt consolidation personal loan will come with its own set of potential risks and benefits, so it’s important to weigh these up too.

• Refinance your personal loan

If your personal loan interest rate is your main concern, you could consider refinancing to a more competitive personal loan product – particularly if you have managed to boost your credit score since initially taking out the loan. Just be sure to pay attention to the loan term you sign up for, because if you extend your existing term, you could end up paying more in total interest charges.

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