Debt consolidation: what’s involved and why it’s a sensible option for some
The information provided in this article is general in nature and is not intended to be financial advice. We always recommend you seek your own, independent financial advice which can take into consideration your specific circumstances.
Life is unpredictable. Unexpected life events like injury or divorce always seem to strike at the worst times, and the rising cost of living can sometimes feel overwhelming.
As the pressure of financial stress mounts, juggling repayments from multiple personal loans and credit cards can feel impossible. It’s at this point, when they start to become unmanageable, that it’s time to take action.
If you own your home or an investment property, you might be able to use it to your advantage by moving all your debts into one payment, known as debt consolidation. This could help you shave a good chunk off your monthly outgoings, giving you some much needed cash flow and breathing room.
Here’s how it works:
Refinance your home loan for debt consolidation
When you use your home loan to consolidate debt, you pay off your credit cards, personal loans and other debts by bundling them into your home loan. That means that the money you owe on your home increases, while all your other debts are paid off.
Get one monthly repayment
Consolidating debts will extend the term of your home loan, but it might still be the smartest option. If you’ve been paying off high-interest debt such as a credit card, it’s possible your monthly repayments will drop because of the interest rate under your home loan, which means you may have a better cash flow position at the end of each month.
Reduce your monthly repayments
Consolidating debts will extend the term of your home loan, but it might still be the smartest option. If you’ve been paying off high-interest debt like a credit card, it’s likely your monthly repayments will drop, and you could still save money in the long run.
Things to consider before consolidating debt
Like any financial move, there are some risks involved with refinancing to consolidate debt. The most common misconception is that a lower interest rate means you’ll pay less interest over the full term of your loan, but this isn’t necessarily true. It all depends on how quickly you’re able to pay off the debt. Here are some things to think about:
- Are there any high break fees involved that would cancel out any savings?
- Will your monthly repayments decrease?
- Can you consolidate all your debts if you have multiple (rather than just one)?
- Are there costs involved with transferring debt to your home loan?
When done right, refinancing your home loan to consolidate debt can save you money, reduce your monthly repayments, and help you get your debt paid off faster.
Can I still use my credit card after debt consolidation?
Technically yes, but it’s worth treading carefully. If you’ve just rolled your credit card debt into a consolidation loan, racking up new charges can quickly undo your progress. Unless you’re confident you can clear the balance each month, it’s often smarter to cut up the card or keep it tucked away while you focus on getting ahead. If you still need access to your credit card, consider lowering the credit limit to help keep your spending in check.
Could consolidation loans hurt your credit score?
In the short term: yes. But for many people, the long-term impact is actually positive. So, while you might see a small dip upfront, consolidating your debts can help improve your credit score over time, especially if it helps you stay on top of repayments.
Here’s what to keep in mind:
A new credit inquiry
When you apply for a consolidation loan, the lender will run a credit check. This shows up as a hard inquiry on your credit file and can drop your score slightly, but the effect is usually small and only sticks around for about 12 months.
Opening a new account
If you’re consolidating your debts into a new loan or credit card, it adds a new account to your credit history. That can lower the average age of your accounts, which might temporarily impact your score. But as that account gets older — and you avoid taking on new debt — it tends to even out.
Higher credit utilisation
If you’re using a balance transfer card to consolidate, your credit utilisation might increase, especially if you’re moving a large balance. That can drag your score down. But at the same time, paying off other debts — like credit cards — will lower utilisation across the board. Your credit report will show your repayment obligations as being met if you pay them off. Over time, that’s a good thing for your credit health.
How does business debt consolidation work?
Running a business is hard enough without trying to keep track of a dozen different repayments. Consolidating those into one loan can make your repayments easier to manage and help steady your cash flow.
Before you apply it’s worth considering:
- You may need to provide extra documentation, including:
- Business Activity Statements (BAS)
- Business and personal tax returns
- Profit and loss statements or other financials
- Some lenders may only consolidate certain types of debt, so check what’s eligible.
- Run the numbers first to make sure the new loan reduces your repayments and puts you in a stronger financial position.
Is debt consolidation the right option for you?
If you’re already struggling to make repayments on your existing debts, you run the risk of falling even further behind when things get tough. Using your home loan to consolidate debt isn’t for everyone, but to find out if it’s a good option for you:
- Put all your debts on the table. Go through each of your debts, write down the total amount, interest rate, current repayments, and the time it will take you to pay it all off.
- Assess your monthly income and expenses. See if there’s anywhere you can cut back or free up extra funds. Determine how much you need to reduce your monthly debt repayments to get your head back above water.
- Use an online calculator. Now’s the time to figure out what your best option is. Try our home loan repayment calculator to figure out how adding to your mortgage balance will change your monthly repayments.
- Speak to a financial advisor. It’s a good idea to seek professional advice before making any decisions by discussing your particular circumstances with a financial advisor.
- The National Debt Helpline offers free, confidential and independent advice from financial counsellors for people who might be experiencing financial stress or just need help to deal with financial difficulties. Visit their website www.ndh.org.au or call 1800 007 007
Less debt, less stress
Out of control debt can feel like a grey cloud constantly hanging over your head. Problem is, sometimes life can get in the way, and it can feel like you’re constantly taking one step forward – then three steps back. Using your home loan for debt consolidation might provide you with a way to financial freedom.
If you think debt consolidation is right for you, Bluestone might be able to help. We offer more flexibility than many other lenders – for example, we offer unlimited debt consolidation, including Australian Taxation Office debts and private loans on Near Prime and Specialist Home Loans.
Find a broker near you
Speak to a broker today about debt consolidation with Bluestone Home Loans.
The information provided in this article is general in nature and is not intended to be financial advice. We always recommend you seek your own, independent financial advice which can take into consideration your specific circumstances.
