How to Use Your Home Loan to Consolidate Debt

When debt repayments are starting to mount, a debt consolidation home loan may help take the pressure off by reducing monthly payments and helping you get back on solid ground.

Whether it’s the rising costs of living or an unexpected life event like injury or divorce, sometimes it can feel like life is conspiring against you. And as financial stress mounts, so do debt repayments from multiple loans or credit cards.
When repayments start becoming unmanageable - that’s the time to take action.
If you are paying off a home loan, you might be able to use it to move all your debts into one payment. If done right, you could shave a chunk off your monthly outgoings, giving you breathing room to get back on track.
How does it work?

When you refinance your home loan to consolidate debt, you are paying off your outstanding balances on credit cards, personal loans or other commitments,  like tax debt,  by bundling them into your home loan.  This means that the time it takes to pay off your home loan is likely to increase.  At the same time, particularly if you have been paying off a high interest product like a credit card, it’s possible that  your monthly repayment will decrease.
What are the benefits?

We’ve already mentioned the first potential benefit - you may be able to reduce your monthly repayments. This is especially helpful when your financial difficulty is temporary - like after a divorce or separation.
Another possible benefit of consolidating debt into your home loan is a reduction of the interest rate charged against the debts you are consolidating. Your home loan is a secured debt.  This means that the money you borrowed is secured by the physical asset you  purchased - your house. Because your lender has this security (think of it as a bricks and mortar safety net) they are generally willing to offer you a lower interest rate, compared to other personal loans and credit cards.
Outstanding amounts on your personal loans or credit cards are termed ‘unsecured’ loans.
There is no physical asset to sell to pay off your debt to the lender if you become unable to meet your repayments.  Unsecured loans mostly are charged at a higher interest rate than home loans.
Are there any risks?

It is important to note at this point that a lower interest rate does not automatically mean that you will pay less interest over the full term of the loan. It all depends on how quickly you pay off the debt. If you are unsure about how refinancing might impact on your overall loan cost, it can be a good idea to get advice from a financial planner before making bold moves.
Is it for me?

If you are struggling to make repayments on your existing debts and risk falling behind even further, debt consolidation via your home loan might be a good option for you to consider.
A good first step is to write out all the information you have right now. Go through each of your debts and write down the total amount, its interest rate, your current repayments and the time it will take you to pay it off,  if nothing changes.
Also look at your monthly income, and your living expenses - how much would you have to save in repayments in order to get your head back above water?  What are you willing and able to cut back on to free up some extra funds?
Once you’ve got these questions answered, it’s time to figure out your best options. This is a good time to hit up some online calculators - try our home loan repayment calculator to figure out how adding to your home loan balance will change your monthly repayments. If you are unsure about how to navigate this process, it is a good idea to get advice from a financial advisor before making bold moves.

When you start considering debt consolidation as an option, you may find the links we’ve provided below helpful to get you ready.

Also remember you can call a Bluestone Debt Consolidation Specialist on 1300 608 658 or request a quote here. Our specialists can help take you through the available home loan options and prepare a quotation. Don’t worry - they won’t do a credit check until after we’ve had a chat and asked for your ok.

Useful Links

National Debt Hotline

Money Smart’s Budget Planner

The information provided in this article is general in nature and should not be taken as constituting professional advice.  Because we do not know your individual financial circumstances it’s a good idea to talk to an accountant or financial adviser before taking out a loan.