Is Consolidating Debt In Your Mortgage a Good Idea?

Paying off multiple debts at once can be very stressful – and if those debts aren’t managed properly, they can end up costing you more and drag you into even more debt. If you’re having trouble juggling your debts, consolidating them into a single loan can be helpful in managing your repayments.

One of the ways to do this is through refinancing. Consolidating other debt – usually a car or business loan, or a large credit card bill – into a mortgage is one of the most common reasons many Australians refinance their home loans. However, this strategy does not work for everyone. Before taking this route, you need to carefully weigh the pros and cons to see if it is right for your financial situation.

How Does a Debt Consolidation Home Loan Work?

By refinancing your home loan, you can consolidate some or all of your existing debt into your mortgage. The goal is to make it easier for you to pay off these debts on a weekly, bi-monthly or monthly basis at a lower interest rate. If your debts are contracted with different lenders, they will be grouped under one lender. You can consolidate many debts, including personal, business, and auto loans, tax debts, and credit card bills, into your home loan.

What Should You Consider Before Consolidating Debt In Your Mortgage?

Ideally, debt consolidation will allow you to take back control of your finances. However, there are several factors you need to consider before deciding if consolidating debt in your home loan is the right choice. Here are a few:

1. Interest rate

When you combine debt with your home loan, you need to make sure that your mortgage interest rate is lower than other loans, or you risk ending up with higher repayments.

2. Break and set-up costs

Refinancing your mortgage to consolidate your debt can require you to pay several fees. Breakdown fees, for example, apply when you decide to refinance within the fixed period of the home loan. Most of the time, homeowners with fixed-term contracts face higher costs for breaking the loan. For this reason, experts advise to wait until the end of the fixed period before refinancing, especially if the cost of the breach is too high. New lenders can also charge a range of upfront fees, including a loan application fee for the new loan.

3. Payment terms

Home loans usually have longer terms than other debts, so it’s best to check whether you’ll end up saving money down the line. A lower interest rate may seem attractive at first, but can cost you more in the long run, especially if your mortgage is for 20 to 30 years.

What are the advantages of consolidating real estate loans?

Consolidating debt in your home loan can have several advantages. These include:

  • Pay a lower interest rate since mortgage rates are often lower than other debts like personal loans and credit cards.
  • Better management of your debts since you only have one regular repayment to follow.
  • Improved cash flow and budgeting.
  • Less paperwork and other time-consuming procedures because you will only be dealing with one lender.

What Are the Cons of Home Loan Debt Consolidation?

Like any financial strategy, refinancing to consolidate debts into mortgage loans has its share of drawbacks. Here are a few:

  • While the interest rate on your home mortgage can be significantly lower than your other loans, interest can accumulate for an extended period of time because your mortgage also has a longer term.
  • The upfront fees and breakage fees can cost you a few thousand dollars.
  • Applying for a refinance when you have a bad credit rating will likely result in rejection, further damaging your rating.
  • You may need to pay mortgage insurance to lenders if your loan-to-value ratio exceeds 80% as a result of debt consolidation.

An important thing to remember is that debt consolidation is just one way to help you manage your finances better. This is not the answer to all of your financial problems. Getting out of the debt cycle involves careful assessment of your spending habits, figuring out what you’re doing right, and avoiding things that can put you in a deeper hole.

If you are considering refinancing your mortgage to consolidate your debt, it is best to consult a qualified mortgage broker, who can give you sound advice tailored to your financial situation.