Refinancing Your Home Loan to Consolidate Debt

Refinancing and debt consolidation can come together to be a straightforward and efficient way to organise your loans and save you time and money.

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, updated on August 8th, 2023       

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Refinancing your home loan to consolidate debt can be one of the most effective ways to ease the stress of paying multiple debts at once. It’s not uncommon to have multiple forms of debt these days (hello credit card, car loan and home loan), but managing multiple payment due dates, fees and interest charges can eat into both your time and money. By combining your existing debts into your home loan, your savings could extend past interest charges and start saving you precious time and simplify your money management.  

How does refinancing your home loan to consolidate debt work?

Refinancing your home loan for debt consolidation is the process of combining all your debts into your existing home loan. This means you’d only be paying your home loan interest rate and the one repayment amount.

As an example, say you have:

Home Loan – Owing Balance of $400,000

Credit Card – Owing Balance of $2,500

AfterPay Account – Owing Balance of $1,500

Car Loan – Owing Balance of $10,000

_________________________________  

TOTAL – $414,000 debt

Everyone of these debts would have a different interest rate, different repayment amount, repayment due date and loan term. Refinancing your home loan would mean applying for a new home loan amount of $414,000 and using that additional $14,000 of home loan funds to pay out your Credit Card, AfterPay account and Car Loan. Now, your situation would look like this:

Home Loan – Owing Balance $414,000

_________________________________  

TOTAL – $414,000 debt

This debt consolidation into your home loan means that you now only have one debt (being your home loan). You no longer have to manage multiple debt repayments, pay different interest rates or remember different due dates. You are only paying your home loan interest rate and one repayment amount.

What kind of debt can I consolidate?

Have you maxed out your AfterPay or ZipPay accounts? Got a credit card you just can’t seem to make headway with? Do you have a personal loan for that holiday you took before COVID locked us down? Maybe you have a car loan from a dealership or bank and the money just keeps coming out every pay. All of these forms of debts can put strain on your income, all of them will have a different interest rate and, yes — all of them can be consolidated into your home loan!

How to effectively manage your debt after consolidating

Pros and cons of refinancing for debt consolidation

Pros

You only have to make one debt repayment, not multiple

You could save money by having only one interest rate and one set of fees

Access most current interest rates

You have more control over your debt

Your money management could be simplified

You may have more flexibility with repayments

In some instances, it could help you pay off your loan quicker

Cons

If you only pay the minimum repayments, you could end up spending more over the long term

You need to understand all fees and costs involved and compare your options to know if it’s right for you

You may not be able to keep your credit card or Buy Now Pay Later service after paying them out in full (Your credit limit might mean that the Home Lender requires you to close these styles of accounts and products after they are fully paid).

Your existing debt may have a penalty fee for repaying early

You’ll need to have enough equity in your home loan to be able to refinance

Increasing the balance of your home loan with your personal debt means that you could be paying off that consumer debt spread over 30 years. The interest rate is lower but the loan term is now longer which could add up to more interest overall.

Top tips for refinancing for debt consolidation

Know how much equity you have in your existing loan to utilise

Know your credit score

Gather your important application documents

Such as:

  • Your recent payslips
  • Existing loan details
  • Pay-out amounts for debts to be consolidated

Understand your refinancing costs (these may include fees or Lenders Mortgage Insurance)

Compare the range of refinancing loans available to you

Common refinancing for debt consolidation questions

Is refinancing to my home loan my only debt consolidation option?

No, you can consolidate debt through a personal loan or by utilising a balance transfer for credit card debt. These options may not offer the same low interest rate or simplification of money management that a home loan refinance could.

Will applying for a home loan refinance affect my credit rating?

Your credit rating (also known as your Credit Score) may or may not be affected by your refinance. Every application for credit is recorded on your credit file and there are various other factors that impact your overall credit rating. The health of your existing rating could influence the likelihood of being approved for a refinance.

Will paying off my credit card or Buy Now Pay Later facility close them automatically?

Typically, no – paying out your credit card or Buy Now Pay Later facility won’t automatically close the account down. Often, you will be required to tell the credit provider you wish to close the facility. Beware, if a credit facility stays open, even unbeknown to you, you could continue to be charged monthly or annual fees.

What happens if my refinancing application is declined?

The good news is that recovering from a declined application is possible. By understanding the reason for decline you can address the issue and re-apply in the future.

Can I add someone onto my loan while I’m refinancing?

Usually, a home loan refinance is the only way to add someone to a home loan. While you are refinancing your home loan to consolidate debt, take the opportunity to add someone onto your home loan if it’s what you’ve been looking to do. It’s important to remember that you’ll need to add the other person onto the Title Deed of the property if you want them to be an owner of your home.

How much equity do I need to refinance my home loan to consolidate debt?

The maximum loan to value ratio is 95%. This means you cannot borrow more than 95% of the value of your home. Basically, you’ll need to have enough equity to cover the debts you are consolidating, without going over 95% LVR. For example, if you 30% equity (LVR of 60%), you can borrow up to  25% of the value of your home. This will leave you with 5% equity and an LVR of 95%. Keep in mind that an LVR of more than 80% will see you having to pay Lenders Mortgage Insurance which is thousands of dollars.

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