Can you consolidate debts by refinancing your home loan?
You’ve no doubt heard about the many benefits of refinancing your home loan. Home loan refinancing in the simplest terms, is transferring your home loan from one bank or lender to another, usually to save money. And you can save a lot of money: an Australian Bureau of Statistics report says that people save an average of $3,108 per year. (2015.) It’s popular, too: about 22,000 Australians refinanced their mortgages in December of that year.
Another little known way to save money on debts – especially high interest debt such as credit cards – is to consolidate your loans as part of refinance package.
How refinancing consolidates debts
When you refinance your home loan, you start all over again. You look for the right deal, whether you want fixed or variable rates, extended terms, and so on. As part of your refinancing arrangement, you can use the mortgage to “wipe out” your credit card or personal debts and roll them into your mortgage. Instead of paying multiple bills a month, all with varying interest rates, you simply make home loan repayments. A credit card interest rate hovers around $18%p.a. on average. The average mortgage rate is closer to 4%. On paper, it makes a good lot of sense. But in reality, you are converting short-term debts into long-term debts, which could cost you more.
Does it make financial sense?
If you were paying off a credit card debt of $3,000 making the minimum repayments each month AND not spending any more on your card, you’d pay a total of $9,521 over 25 years, paying a whopping $6,521 in interest (assuming an interest rate of 18%.) But you could wipe out that credit card debt in just two years by making an extra $87 in repayments each month (only paying $587 in interest.)
Of course, you may have overlapping debts such as personal loans and other credit cards. If you struggle to make all these repayments each month, a home loan makes a great deal of sense. But you have to watch out for fees, charges, or whether the cost vs. benefit is worth it.
Get good advice first – Finance CEO
“This isn’t something you work out on the back of an envelope – you need to sit down with a qualified lender or broker and crunch the numbers,” says Savvy CEO Bill Tsouvalas. “Will the consolidated debts attract more interest over time? Can you make allowances for extra repayments to offset the long-term interest? It’s confusing, but a trusted financial professional can make it clearer, and easier.”