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Refinancing for debt consolidation

Refinancing for debt consolidation

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 loanLoan amountInterest rateLoan periodMonthly repaymentsTotal interestTotal cost of loan
Home loan$600,0005%30 years$3221$559,535$1,159,535
Personal loan$10,0009%3 years$318$1448$11,448
Car loan$30,0009%5 years$623$7,365$37,365
TOTALS$640,000$4162$568,348$1,208,348

After debt consolidation

Type of loanLoan amountInterest rateLoan periodMonthly repaymentsTotal interestTotal cost of loan
Home loan (refinanced with debt consolidation)$640,0005%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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Learn more about home loans

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is the average length of a home loan?

Most Aussie lenders offer home loans with a 30-year term, meaning that you should pay back the full loan amount and the interest you owe on the amount in 30 years. 

However, home loans can also have a shorter or longer term. They may be as low as ten years or up to 45 years, depending on the product and lender. 

It’s worth remembering that a longer loan term usually means you’ll end up paying a lot more interest in total, but your scheduled repayments may be more manageable. In contrast, you could opt for a shorter loan term if you are comfortable making large repayments in exchange for paying less interest over the term of the loan.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.