What is debt consolidation and what has it got to do with refinancing?

If you’ve got a few different loans on the go at once, there’s a good chance you could be paying several different interest rates on those loans. Consolidating your debt by refinancing could help you to save on your loan repayments.

Read on to learn more about debt consolidation and how refinancing can help.

What is debt consolidation?

Debt consolidation is the process of rolling all of your loans and debts into one single loan. This can make it easier to manage your payments. Plus, if you have an existing home loan at a lower interest rate than your other debts, consolidating these debts into your home loan could help you to save on your repayments.

Benefits of debt consolidation

Debt consolidation offers a number of advantages. It can help you to:

• Streamline repayments: By rolling multiple debts into one you only have to make a single monthly payment. This helps to simplify your financial management and reduces the chances of missing payments.
• Save on interest rates: If you’re able to secure a consolidation loan with a lower interest rate than the average rate of your existing debts, you could save money on interest payments.
• Save on account fees: If you’re having to foot the bill for numerous account fees, it could be worth consolidating your debt into a single loan. That way you only have to worry about fees for one account.
• Improve your credit score: Successfully managing a consolidation loan and making timely payments can have a positive impact on your credit score over time. It demonstrates responsible financial behaviour, which could work in your favour the next time you go to take out a loan.

Refinancing to consolidate your debt

If you’ve got an existing home loan and a whole bunch of other debts, you might want to consider using your mortgage for debt consolidation. Especially if your home loan interest rate is lower than the rate you’re paying on each debt. That’s where refinancing comes in.  

But refinancing isn’t your only option when it comes to consolidating your debt. Instead, you might choose to consolidate your debts into a single personal loan. If you’re able to find a loan with a lower interest rate than your existing loans, you could end up paying less in monthly repayments. Plus, you could also potentially save a bit of cash by eliminating multiple fees across all your debts.

Whether you decide to refinance your home loan or take out a personal loan, by rolling all of your debts into a single loan you’ll only have to worry about making repayments on one loan. This can be a huge help when it comes to managing your household cash flow.

While refinancing to consolidate your debt can work in your favour, there are a few different factors worth considering determining whether it’s the right move for you.

Factors to consider before refinancing

While refinancing to consolidate your existing debt can be a good move, it’s important to make sure it’s the right move for you before getting the ball rolling on switching loans. Here are a few of the key factors to consider to help you decide.

Refinancing costs

Refinancing your home loan doesn’t come without its own set of costs and fees so it’s important to make sure that you’ll be spending money to eventually save money over the long term.Depending on your circumstances, your existing lender might charge you discharge fees or exit fees if you’re leaving a fixed-term loan before it ends.

But that’s not all, there’s also a stack of fees that come with setting up a new account, including:

• Establishment or application fees
• Property valuation fees
• Settlement fees
• Lender's mortgage insurance (if applicable)

Check out our blog to learn more about the costs that come with refinancing your home loan.

Longer loan term

A lower interest rate might be appealing, but have you thought about how the length of the new loan compares to your current debts? Extending the repayment period can help lower monthly payments, but it’ll more than likely result in more interest repayments over the life of the loan. Make sure you choose a term that aligns with your financial goals and capabilities.

Increased loan to value ratio (LVR)

When you add more debt to your home loan, you’re essentially increasing the amount you owe on your mortgage. In turn, this is likely to affect your loan to value ratio (LVR) and the equity you have in your home. If consolidating your debts into your mortgage pushes your LVR above 80%, you might need to pay lender’s mortgage insurance (LMI) to be able to refinance. This can be a significant expense, so make sure you compare this cost against the potential savings.

Increased risk

If you’re considering tapping into your home equity with a cash out refinance, it’s important to understand the risks that come with using your home as collateral. If you’re not able to keep up with your repayments you could ultimately risk losing your home.

Financial discipline

Refinancing to consolidate your debts is one thing, but it’s important to make sure you’re addressing the issue at the root of the problem. If you have poor spending habits, you could find yourself in the same situation down the track, but with even more debt. Make sure you’re taking active steps to reduce your existing debt and practice healthier spending habits so you don’t end up accruing more loans than you had in the first place.

Are you ready to refinance? At Unloan, we’ve created a new kind of home loan to help you save more. From competitive interest rates to annual loyalty discounts and more, check out our loan features or see if you’re eligible to apply.

‍

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.