What is a debt consolidation home loan?
A debt consolidation home loan allows you to combine some or all of your existing debts into your mortgage.
Many people opt to roll multiple forms of unsecured debt into their mortgage, particularly if their mortgage interest rate is lower than the rates on their other loans.
Your home then becomes security for the loan and you’ll make one monthly repayment to cover your consolidated debt.
Why should I consolidate my debt?
If you have multiple loans and you’re having trouble keeping track of what bills are due or when they’re due, it can help to consolidate your debts into one loan.
Many people have a combination of loans that can become overwhelming to manage.
If you fall behind in your repayments you may find yourself signing a debt agreement. A debt consolidation home loan may be a better option to help you regain control of your financial situation and take steps towards reducing your debt.
Read our real-life case study here.
What debts can I consolidate?
Generally, the debts you want to consolidate into your home loan are high-interest rate unsecured debts such as:
- Credit cards
- Personal loans
- Car loans
- ATO tax debts
- Buy now pay later services such as AfterPay.
Do I qualify for a debt consolidation loan?
Generally, banks will look at your repayment history, the amount of unsecured debt, the types of debts etc. when asssessing your application.
They want to see:
- On time home loan repayments for the past 6 months.
- On time credit card and personal loan repayments for the past 3 months.
- No missed repayments with the bank that you are applying with.
- A strong financial position so that you have the ability to repay the loan.
- A stable employment history.
- A good credit history.
- You need to prove that you will stay in control of your debts in the future.
Specialist lenders can consider missed repayments and a bad credit history, however, the interest rates will be higher.
Was this a one-off event?
Whether or not, missed repayments or a bad credit history was caused by a one-off event is a major assessment criteria of lenders.
For example, lenders are more understanding of missed repayments if it was caused by a one-off event such as divorce, job loss, medical emergency etc.
In contrast, if it wasn’t caused by such an event, lenders will be concerned that you are living beyond your means or are experiencing financial hardship from which you will not recover.
To mitigate this, we use various methods to explain to the lenders that this is a one-off event.
If you have had serious credit impairment, then you must prove that you can afford the new loan amount.
If you don’t meet the above criteria we may still be able to get you approved with a specialist lender.
How much debt can I consolidate?
- If you want to use one of the major lenders, you can consolidate up to five different debt facilities with a maximum amount of between $50,000 and $100,000 depending on the lender.
- With specialist lenders, there is no limit to the amount you can consolidate provided you have enough equity in your property to cover the debt. (Equity is how much your property is worth minus how much you owe to the bank/lender.)
- If you don’t have enough equity there may still be some options available to you. In some cases, we can apply to have part of your debt written off and the rest of your debt consolidated into your home loan.
- Standard home loan rates are available if we can get you approved with a major lender.
- Your repayments may be more affordable if we can secure lower home loan rates.
- You may be able to improve your cash flow and savings position.
- You may be able to reduce stress and manage your debt more effectively.
- You can prevent creditors from pursuing you for funds and protect yourself against the risk of bankruptcy.
- You will be converting your unsecured debts into secured debt, i.e. one that is secured by your home or property. That means if you can’t meet your mortgage repayments, your property will be at risk as the lender can now sell it.
- Your loan term is extended over a longer period of time, so you’ll pay more in interest over the life of the loan. There are ways to minimise the amount of interest paid by making extra repayments once you’re in a position to do so.
- By rolling other debts into your home loan, you will alter your loan to value ratio (LVR) and this could negatively impact the interest rate you are required to pay.
- If your LVR shifts above 80% as a result of the debt consolidation you will need to pay Lenders Mortgage Insurance (LMI) or risk fees.
- There may be set up fees for a new home loan package.
- We can order a free valuation upfront.
- We know which lenders are lenient with debt consolidation.
- We know which lenders can accept missed payments and impaired credit (a higher interest rate will apply).
Remember, a debt consolidation home loan isn’t available to all borrowers!
Our mortgage brokers work with both banks and specialist lenders. Call us today on 1300 889 743 or enquire online.
Can I refinance to consolidate debt during COVID-19?
Yes, please speak with one of our mortgage brokers by calling us on 1300 889 743 or fill in our online enquiry form to see if you should refinance your home loan during the COVID-19 pandemic.
What are the pros and cons of debt consolidation loans?
It’s important to carefully consider both the pros and cons of debt consolidation loans, so that you can make an informed decision.
The pros:
The cons:
Should I use a mortgage broker?
Have you approached your bank directly about debt consolidation and got knocked back?
Our mortgage brokers at Home Loan Experts have access to almost 40 lenders including major banks and specialist lenders, which means we can offer a wider range of home loan options.
We know exactly which lenders accept borrowers with missed repayments and those with the ability to pay out multiple debts.
Speak to us!
Managing debt is easier with help from professionals. We know the lenders that will consider your situation so we only submit your application with the right lender, to maximise the likelihood of getting approved.
Don’t wait until you are buried deep in debt, we can help you take control of your finances:
Our mortgage brokers are experts in consolidating debts into a mortgage. Please call us on 1300 889 743 or enquire online to find out how we can help.
Tips to help you manage your debt
Debt consolidation is not a silver bullet. It doesn’t reduce your level of debt, it simply allows you to better manage your repayments. Ideally, a debt consolidation strategy should be implemented in combination with a change to your spending behaviour so you can work towards reducing your debt level over time.
Consider using a budgeting tool
You may want to review your spending habits to ensure that you avoid falling into a debilitating debt cycle that will affect your borrowing power for years to come.
The ASIC Moneysmart website has a great budgeting tool that helps you to track your spending and there are plenty of other resources available online.
Pay off your refinanced debt as quickly as possible
Consolidating all of your debts into your mortgage increases your loan balance. When interest rates rise, your repayments will increase. This is known as concentration risk.
Consider taking advantage of all available savings you have to make additional repayments to pay off your new debt as soon as you can.
Close your old credit card accounts
Many borrowers keep their credit facilities open after they have consolidated their existing credit card debts into their home loan. If you continue to use your credit accounts you will run up more debt. You may also be charged account-keeping fees.
Speak to a professional
If you have consolidated debts in the past, you may need help to break out of a cycle of poor spending habits. Consider speaking to Debt Fix, professionals in debt consolidation and management, or a debt counsellor who can educate you on ways to save, budget and plan out your spending in line with your income.
Apply for a debt consolidation loan
If you’re ready to consolidate your debts, we have the expertise to help.
Call us on 1300 889 743 or enquire online. We are mortgage brokers specialising in bad credit loans and can help you regain financial control through a debt consolidation home loan.
Speak to us today!
A debt consolidation home loan – Case study
Liam* had multiple credit cards in arrears, with a hefty interest rate of 20% p.a.
He told me that he had racked up the credit card debt as a student. He also had a car loan at an interest rate of 7.8% p.a. and a home loan at 4.45% p.a.
Liam was finding it very difficult to meet all his commitments and felt he was on the brink of true financial hardship.
The first hurdle
As we talked it became clear that if he was able to consolidate his high-interest debts into his home loan, he would be able to manage his finances.
After doing a thorough assessment I was able to consolidate all Liam’s debts with a specialist lender at a 5.5% p.a. interest rate. (No major lender would consider his application as he had missed repayments on his credit cards.)
I advised him to stay on top of his home loan repayments for the next 6 months, after which I’d be able to switch his loan to a major lender with a lower interest rate.
After six months
Liam stayed on top of his home loan repayments for the next 6 months as advised and I was then able to refinance the loan with a major lender at 3.8% p.a (back in 2018). Since then he has called the bank and fixed his loan at 2.29% p.a.
He called me and thanked me for saving him from financial hardship. He was extremely happy – I think I have a customer for life!
This is a real life case study provided by one of our expert brokers.
*Name has been changed to protect privacy.
FAQs - Debt consolidation loan
What if I don’t have enough equity?
There may still be some options available to you. In some cases, we can apply to have part of your debt written off and the rest of your debt consolidated into your home loan.
This option isn’t available to all borrowers, please contact us for more information.
Can I consolidate debt into a first time home loan?
Yes!
First home buyers can consolidate their existing debt into their home loan using a guarantor.
With a guarantor, you can borrow 100% of the property value, an extra 5% for the associated purchase costs and up to another 5% to cover other debts.
Essentially, it means that you can borrow up to 110% of the property value, depending on how much equity your guarantor has in their own property.
To qualify, your parents (guarantors) must be working, and you must not have missed repayments on any of your debts. Lenders are very conservative when assessing this type of loan.
Should I be worried about the interest rates?
Not necessarily, because home loan interest rates are generally much lower than the rates on unsecured debts. In fact, mortgages are the cheapest source of credit for homeowners anywhere in the world.
To be clear, the interest rate on home loans from specialist lenders can be anywhere from 1% to 3% higher than standard home loan interest rates.
So, if you have a severe credit problem, i.e. defaults, then you’ll pay a higher interest rate, and lower if you only have minor credit issues, i.e. missed repayments.
Remember, going with a specialist lender is a temporary solution. Once you’re making regular mortgage payments, we’ll refinance you with a major lender at a much more competitive rate.
Ultimately, you’ll likely be better off!
Apply for a debt consolidation loan today!
Think you’re ready to consolidate?
There is no substitute for expert advice!
Call us on 1300 889 743 or enquire online. We are the experts in bad credit loans and can help you regain financial control through debt consolidation. Speak to us today!
