Consolidating credit card debt into your mortgage

Understanding debt consolidation

Debt consolidation (also known as refinancing) is the process of combining a number of different loans into a single debt. There are various ways you can do this, including utilising personal loans, balance transfer credit cards, and home loans. The main benefits of consolidating debt is to simplify your repayments, make the most of lower interest rates, and potentially improve your credit score over time. 

What is a debt consolidation loan?

A debt consolidation loan is a loan specifically designed to combine multiple debts into a single loan with a fixed or variable interest rate and monthly payment. The idea is that you consolidate multiple higher interest rate debts into a single debt with a lower interest rate. This can be a valuable tool for anyone wanting to simplify their finances, and improve their overall debt management.

The most common types of debt that people want to consolidate include credit cards, personal loans, car loans, “Buy Now, Pay Later“ services, bank overdraft facilities or line of credit, ATO tax debt and business loans. Getting approved for a debt consolidation loan depends on your individual financial situation. Lenders will consider factors like your credit history, income, and employment stability.

Let’s now look at what loan consolidation options exist in the market. 

Loan consolidation options

There are a number of debt consolidation loan options available, each with its own advantages and considerations.

Let’s start by detailing these.

• Mortgage Refinancing: This involves replacing your existing mortgage with a new one, incorporating your other debts in the new loan.
• Home Equity Loans: Secured by your home, these loans allow you to borrow against the equity you've built up.
• Personal Loans: These unsecured loans are offered by banks, credit unions, and online lenders. They provide a lump sum that can be used to pay off existing debts.
• Balance Transfer Credit Cards: These cards offer a promotional period with a low or 0% interest rate, allowing you to transfer existing credit card balances.

You also need to know the difference between a secured and unsecured loan.

Secured Loans: A secured loan, such as a mortgage loan, requires you to provide collateral – in this case, your property. If you are unable to keep up with repayments on the loan, the lender has the right to seize the collateral. The pros of secured loans include lower interest rates, simplified payments and the ability to borrow large amounts. 

Unsecured Loans: Unsecured loans, like personal loans and balance transfer credit cards, do not require you to provide any collateral to qualify for them. While they offer less risk to your assets, they typically come with higher interest rates.

Let’s now look at how consolidating your credit card debt into your mortgage works. 

Consolidating credit card debt into your mortgage

Consolidating your outstanding credit card debt involves replacing your current mortgage with a new loan. The new loan covers your existing mortgage balance and your outstanding credit card debt. Essentially, you're taking out a larger mortgage to pay off your credit cards, but potentially at a lower interest rate and with a single repayment. 

The first step is to calculate the total amount of your credit card debt. This sum is then added to your current mortgage balance. The new loan will cover this combined amount.

Let’s now detail the benefits of consolidating credit card debt.

Advantages of consolidating credit card debt

• Lower Overall Interest Rate: Mortgages typically carry lower interest rates than credit cards. By consolidating, you effectively replace high-interest debt with a lower-interest loan.
• Simplified Payments: Instead of managing multiple credit card payments with different due dates, you will have a single, predictable monthly mortgage payment.
• Potential for Improved Cash Flow: By extending the repayment term (e.g. to 30 years), you may reduce your monthly payment, freeing up cash for other expenses.

You also need to be aware of the potential drawbacks of debt consolidation.

Potential drawbacks of debt consolidation

• Extended Loan Term: While lower monthly payments are appealing, extending your mortgage term means you'll be paying interest for a longer period, potentially increasing the overall interest cost.
• Increased Mortgage Balance: Adding credit card debt to your mortgage increases what you owe - so you need to make sure you have enough equity in the property to consolidate.
• Risk to Home Equity: Your home acts as collateral for your mortgage. If you default on the loan, the lender can foreclose on your property. This means you risk losing your home, which now includes your consolidated credit card debt.
• Spending Habits: Without changing your spending habits, you risk accumulating new credit card debt.

Let’s now look at what you need to think about before you start the process of consolidating your debt. 

Steps to take before consolidating debt

Like any decision that impacts your personal finances, you should:

• Evaluate your financial situation, including current interest rates and the repayment terms of the new loan.
• Understand all the potential costs, including early loan repayment, break and refinancing fees.
• Assess the impact of extending your loan term, which can lead to higher overall interest payments over the life of the loan.
• Get advice: Our dedicated Loan Consultants can discuss your refinance objectives and help find the best consolidation strategy for your personal finances.

In conclusion, consolidating credit card debt into a dedicated loan can simplify your personal finances and offer potential savings through lower interest rates. However, it's vital to approach this decision with a comprehensive understanding of the associated risks, including extended loan terms, increased overall costs, and potential impacts on your home equity. If in doubt, get professional advice, so you can determine if debt consolidation aligns with your long-term financial goals.