A quick guide to debt consolidation through refinancing

a couple doing research about consolidating debts through refinancing


Refinancing multiple debts into your home loan can help simplify your finances – especially if you’re juggling many loans, each with different repayments, fees and interest rates. Sounds like a great idea? Before deciding if this is the right choice for you, it is important to understand how it all works.

This easy guide details what you need to know about debt consolidation when refinancing, in five simple steps.

Debt consolidation home loans explained
Consolidating debt through home loan refinancing means rolling all your existing debts into a single mortgage. So instead of repaying individual debts with different interest rates and fees for mortgages, cars, credit cards, personal loans and even phone bills, you’ll have just one ongoing repayment to manage each month – which may help save you time and money. More on the benefits of refinancing here.

Five steps to refinancing with a debt consolidation loan
Ready to consolidate your debts by refinancing? First, you need to know what to expect.

Step 1. Make sure it's the right option for you
Be clear about why you want to refinance. Ideally consolidating your debts means better management of your finances. But If you’re looking for an easy way out of credit card debt, you may want to re-think your spending habits.

Step 2. Work out all the costs involved with your existing debts
To make sure refinancing is worthwhile, you'll want to understand all the costs involved with each existing loan. Write down your individual repayment amounts, loan interest rates and all the fees associated with your current debts.

Step 3. Find out how much you can borrow
Once you’ve calculated the combined total of your loans, check you’ll actually be able to borrow the amount you need. As a first step, it is a great idea to speak with your current home loan provider as they may be able to review your mortgage and offer you a better deal. To get you started, use our borrowing power calculator to find out how much you could possibly borrow.

Step 4. Compare different loans
If you decide to switch to a new home loan you need to make sure you’re really getting a better deal – because the idea is to save money and pay off your debts. Look for a combination of low interest rates and minimal fees. If offset accounts and redraw facilities are important to you, make sure they’re available with your new loan.

Step 5. Know the fees for refinancing
Your existing loans may charge exit fees if you pay them off early. There will also be fees associated with opening a new loan. Ask your lender for a complete list of fees that you need to budget for and work out if the upfront cost will pay off in the long run. Check out the common fees you can expect to pay here.

Other factors to look out for
When you transfer short-term debt, like personal loans and credit cards, into long-term debt like a mortgage, you are securing that debt against your home. And while your monthly repayments may go down, you’re paying them over a longer period of time – which may mean paying more in interest in the long run.

Apart from choosing the right type of home loan (fixed, variable or split) and working out if you can make extra repayments to chip away at that debt even faster, It is also important to compare all the costs of the new loan against the existing one to make sure that your new loan repayments are more affordable. You can also learn more about the risks associated with refinancing to consolidate debt on the MoneySmart website.

Finally, don’t be tempted to start building up your personal debt again – it’s a good idea to cut up the credit cards you’ve paid off after consolidating those debts. Take a look at our 5 budget planning tips for more ideas on how to be smart with your cash flow.

Refinancing your home loan to consolidate debts is a major decision, and you need to get the right advice about whether it’s a suitable strategy for your lifestyle and budget. Speak to a mortgage broker or a financial adviser who will be able to guide you through the whole process and help you make the right choice.

At Pepper Money, there is no limit on the number of debts that can be consolidated into your home loan. If consolidating your debts sounds like the right option for you, speak to a Pepper Money lending specialist on 13 73 77 or enquire online today. Alternatively, learn more about our debt consolidation home loans here.

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