A debt consolidation home loan allows you to roll multiple debts, like credit cards, personal loans, or car finance, into your mortgage. You can combine all your repayments into one simple, manageable loan. This strategy helps homeowners reduce financial stress and may lower their overall repayments, depending on the loan terms offered by your lender.
At Home Loan Experts, we specialise in helping borrowers consolidate their debts through a home loan, even if they’ve had missed repayments or bad credit. This guide will explain how debt consolidation home loans work, what debts you can combine, and how to check if you qualify.
How Does A Debt Consolidation Home Loan Work?
A debt consolidation home loan works by refinancing your current mortgage to include other unsecured debts, like credit cards or personal loans. Instead of managing multiple repayments, you’ll combine them into your home loan, leaving you with just one payment to manage.
To do this, lenders will assess how much equity you have in your home and review your income, expenses, and credit history to ensure you can afford the new loan. If approved, your existing debts are paid off and rolled into your home loan. This often results in a lower overall repayment compared to paying off several high-interest debts separately. However, it’s important to weigh up the total interest you might pay over the life of the loan, especially if you extend the loan term.
What Debts Can I Consolidate?
Generally, the debts you want to consolidate into your home loan are high-interest rate unsecured debts such as:
- Credit cards
- Personal loans
- Car loans
- ATO tax debts
- Buy now, pay later services such as AfterPay.
How Much Can I Borrow?
- Borrow up to 95% (including LMI) of the property value if you have a clean credit history and all of your repayments have been paid on time. This is assessed on a case-by-case basis.
- Borrow up to 80% of the property value if you have missed payments recorded on your file but you’ve been making your payments on time for the last 6 months.
- Borrow up to 75% of the property value if you have missed repayments or other serious credit impairments.
Do I Qualify For A Debt Consolidation Loan?
Each lender has their own rules, but most want to see signs that you can manage your money and stay on top of future repayments. Here’s what they typically check:
- You’ve made on-time home loan repayments for the past 6 months.
- You’ve had no missed payments on credit cards or personal loans in the last 3 months.
- You haven’t missed any repayments with the lender you’re applying to.
- You have a stable job and enough income to cover the new loan.
- Your credit history is clear, or you’re showing signs of improvement.
- You’re in a strong enough financial position to manage the consolidated loan.
Specialist lenders can consider missed repayments and a bad credit history, however, the interest rates will be higher.
Was your bad credit caused by a one-off event?
Lenders will want to understand why you had credit issues. If your missed repayments or defaults were caused by a one-off event, such as job loss, divorce, or a medical emergency, they are usually more understanding.
If the issues weren’t linked to a major event, lenders may see it as a sign of ongoing financial stress or poor money management.
This is where working with a mortgage broker helps. We explain the situation clearly to lenders and show that the problem was temporary and not likely to happen again.
If you’ve had serious credit problems, you’ll still need to prove you can afford the new loan. And even if you don’t meet the usual criteria, you might still qualify through a specialist lender.
What Are The Pros And Cons Of Debt Consolidation Loans?
The Pros
- Home loans often have lower interest rates than unsecured debts like credit cards or personal loans, potentially saving you money on interest payments over time.
- Instead of juggling multiple loans and credit cards, you’ll have just one repayment to manage.
- Paying off multiple unsecured debts in full could improve your credit score by reducing your credit utilisation ratio and minimising missed payments.
- A structured loan term gives you a plan to pay off your debts in full, rather than staying stuck with revolving credit.
- By consolidating and making consistent repayments, your credit history can gradually recover.
The Cons
- By rolling unsecured debts into your mortgage, your home becomes security for those debts. If you can’t meet repayments, your property will be at risk as the lender can now sell it.
- Your loan term is extended over a longer period of time, so you’ll pay more in interest over the life of the loan.
- Adding your other debts into your home loan will alter your loan-to-value ratio (LVR), and this could negatively impact the interest rate you are required to pay.
- If your LVR shifts above 80% as a result of the debt consolidation, you will need to pay Lenders Mortgage Insurance (LMI) or risk fees.
- There may be upfront costs such as lender fees, break costs, or mortgage registration fees when refinancing.
A debt consolidation home loan – Case study
This is a real-life case study provided by one of our expert brokers.
*Name has been changed to protect privacy.
Liam* had multiple credit cards in arrears, with a hefty interest rate of 20% p.a.
He told me that he had racked up the credit card debt as a student. He also had a car loan at an interest rate of 7.8% p.a. and a home loan at 4.45% p.a.
Liam was finding it very difficult to meet all his commitments and felt he was on the brink of true financial hardship.
The First Hurdle
As we talked it became clear that if he was able to consolidate his high-interest debts into his home loan, he would be able to manage his finances.
After doing a thorough assessment I was able to consolidate all Liam’s debts with a specialist lender at a 5.5% p.a. interest rate. (No major lender would consider his application as he had missed repayments on his credit cards.)
I advised him to stay on top of his home loan repayments for the next 6 months, after which I’d be able to switch his loan to a major lender with a lower interest rate.
After Six Months
Liam stayed on top of his home loan repayments for the next 6 months as advised and I was then able to refinance the loan with a major lender at 3.8% p.a (back in 2018). Since then he has called the bank and fixed his loan at 2.29% p.a.
He called me and thanked me for saving him from financial hardship. He was extremely happy – I think I have a customer for life!
Connect With A Debt Consolidation Expert Today
Struggling with multiple repayments? Our specialists can help refinance your home loan and consolidate your debts into one simple, manageable payment.
Get A FREE ASSESSMENTFAQs
Can you consolidate debt into a first-time mortgage?
No, you cannot. Most lenders do not allow debt consolidation into a first home loan at the time of purchase. However, once you build up equity, you may be able to refinance and consolidate debts later.
Can I get a consolidation loan if my accounts are in arrears?
How can a debt consolidation specialist help?
What if I don’t have enough equity?
Should I be worried about the interest rates?
Does getting debt consolidation hurt your credit?
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