Debt consolidation can have a lot of advantages and help you pay off your home loan faster.

The Australian Bureau of Statistics put average Aussie household debt at around $261,492 in 2021-22. It also found that 75% of households around the country had debt. In December 2023 the amount of mortgage debt that Australians were carrying was $124.8 billion.

Clearly, debt is an issue for almost all Australians!

Whether it’s a home loan, personal loan, car loan, credit card, student debt – or a combination of these – our liabilities can have a big impact on our everyday lives. The very existence of debt can severely add to our stress levels. And having multiple debts to juggle can significantly increase our mental load.

One pathway that can help make managing multiple debts easier is debt consolidation. In fact, you can even consolidate your debts into your home loan making it easier to manage as well.

Here’s how debt consolidation could work for you!

What is debt consolidation?

Managing multiple debts can be a lot of work. It means juggling multiple interest rates, repayment amounts and due dates.

Debt consolidation is the process of combining all of your debts into one. The obvious advantage of this streamlined approach is it makes your debts easier to manage. You have just one interest rate, repayment amount and regular due date. This also makes keeping track of what you need to pay and when far simpler, so overall budgeting easier. Debt consolidation can also give you a clearer idea of when you may become debt-free.

How can debt consolidation help manage my mortgage?

Some choose to consolidate their debts into a personal loan. But you can also choose to consolidate your debts into a refinanced home loan.

Home loans typically have lower interest rates than other kinds of loans and debt, such as personal or credit card. And this can work to your advantage. Lower rates mean you’re saving money on your regular repayments. Because of that you may be able to increase your mortgage repayments and pay off your debt more quickly.

You can also borrow against the equity in your home to pay off your debts. But lenders usually have limits on how much of your equity you can access at one time. While this option will mean you have less debt, it will also mean you have less equity.

Other considerations of consolidating debt into your mortgage

One drawback of debt consolidation into your home loan is that mortgages typically have longer terms than personal loans. This means that you may end up paying more interest over the life of the loan. And you will also have to accept the angst of seeing your home loan balance rise again. This higher balance may also mean that your loan term is extended.

One solution for this is to opt for a loan split. This essentially means setting up a second loan that is still linked to your home. It will allow you to pay off the added, shorter-term debts within a few years, rather than the full mortgage term.

Another consequence of an increased loan amount is a higher loan-to-value ratio (LVR). A higher LVR could mean an increase to your interest rate. If your LVR is above 80%, it could also mean you have to pay lenders mortgage insurance (LMI).

The pros and cons of consolidating into your home loan

Pros:

• Simplified debt repayment schedule
• Clearer understanding of debts
• Potentially lower interest rate on debt
• Ability to pay higher repayments (if lower interest rate)
• Fewer account fees

Cons:

• Longer loan life, which could ultimately mean more interest paid
• Increased home loan balance
• Increased LVR could lead to a higher interest rate or LMI obligation
• Reduced control and flexibility in paying off debts separately

What to do next in the debt consolidation process

If you’re interested in exploring debt consolidation, here are some steps to take.

1. Consider your personal situation. Debt consolidation into a home loan isn’t right for everyone. Weigh up the pros and cons listed above to see if it’s right for you. Make sure the rewards outweigh the risks.
2. Find out if you’re eligible. You will need to have enough equity in your home to be able to increase the balance of your loan (to absorb your debts). Given your debts, your lender might also want to assess your financial situation to ensure you’re not a risky applicant.
3. Find the right loan. To consolidate your debts into a home loan, you should consider refinancing to ensure you’re getting the best possible deal.
4. Minimise excessive spending. If your debts are a result of overspending, consider how you can manage your spending habits better. Now that you’ve consolidated your debts, it’s a good opportunity to prioritise becoming debt-free. Don’t fall victim to more spending.
5. Seek expert advice. If you’re considering debt consolidation, consult a professional to ensure it’s the right path for you. The experienced team at Lending Loop will be able to talk you through the process and help you find the best debt consolidation loan.