Can You Consolidate Debt Into Your First Mortgage

4 June

Anyone who has recently bought a home with a first mortgage might be wondering if it's possible to use the equity in the home to start afresh. Consolidating multiple consumer debts into your mortgage might be an option to simplify your finances.

However, everyone's financial situation is unique, so it is important to understand whether consolidating your debts into your mortgage is beneficial for you. This guide explains how to consolidate consumer debt into your first mortgage and considers the advantages and disadvantages of first mortgage debt consolidation.

Overview

What Is Debt Consolidation?
Can You Consolidate Debt Into Your First Mortgage
The Advantages and Disadvantages of Consolidating Debt Into Your Mortgage

What Is Debt Consolidation?

Debt consolidation is the process of combining multiple debts into one single loan, which means you only have one payment to meet per pay cycle. Consolidating your debts into one repayment can help you better manage your finances and meet your repayments.

Broken Hill Bank offers a credit crusher loan that allows you to consolidate multiple smaller loans into one personal loan. This is an alternative to refinancing your first mortgage that allows you to pay down consumer debt more quickly. The best option for you will depend on your personal financial circumstances.

Can You Consolidate Debt Into Your First Mortgage?

Yes, you can consolidate your debts into your first mortgage. Debt consolidation means refinancing the mortgage to include the debts, increasing the balance owing and possibly the loan term.

You will need to have more than 20% equity in your home to refinance without paying LMI. It is important to remember that adding more money to your mortgage can impact the total cost of your home loan.

Here is an example:

You refinance and add $30,000 of debt to your mortgage over 25 years, at an average interest rate of 6.9%.

This increases your monthly mortgage payment by approximately $210.

If you make only the minimum mortgage payment each month, the combined principal ($30,000) and interest ($33,037, calculated at 6.9% over 25 years), paid back over 25 years, comes to a total of $63,037. This is more than double the initial amount borrowed.

Pros and Cons Of Consolidating Debt Into Your Mortgage

Consolidating debt into your mortgage repayments can be beneficial, but it also has some risks. Here are some of the things to consider before applying for a debt consolidation home loan.

Advantages Of A Debt Consolidation Mortgage

There are many different advantages to refinancing and “consolidating” your debt, such as:

It can be an effective way to pay off high-interest-rate debt with the lower interest rate of your home loan.
It can save you money if you pay off the debts within a short timeframe.
It can free up your cash flow, allowing you to meet all financial commitments in the short term.

Disadvantages Of A Debt Consolidation Mortgage

Some of the disadvantages of consolidating your debt into your mortgage include:

The long loan term of a typical mortgage could mean that the total borrowing costs for the debt you are consolidating increase dramatically.
Your monthly mortgage repayments will increase.

What To Consider When Consolidating Debt Into Your Mortgage: Checklist

When you decide to consolidate your smaller debts into your mortgage, consider:

Interest rates available at the time of refinancing. Interest rates may be higher or lower than when you originally took out the loan.
The total repayments over time and how that will impact your budget and overall financial situation.
The time it will take to pay off the debts. With smaller debts like loans from finance companies, personal loans or credit card repayments, the repayment time on these is much shorter.
To be eligible to refinance your home loan without paying LMI, you will need more than 20% equity in your property.
When refinancing, you will need to apply. Your bank statements must show that you can service the higher mortgage repayments and meet the lender's eligibility criteria.

Refinance Debts With Broken Hill Bank

Now that you understand the advantages and disadvantages associated with consolidating your debts into your home loan, you can start deciding whether a debt consolidation personal loan or refinancing your home loan is the best option. If you want to discuss product suitability with our expert team, we can help you to compare your options.

FAQ

Can I consolidate debt into a new mortgage?

You can consolidate your smaller debts into your mortgage by refinancing, provided you meet the lender’s conditions and requirements. This includes being able to service the new, higher mortgage payment. You will need to have enough equity in your property to cover 20%, plus the amount of debt being added to the mortgage, to avoid paying LMI.

Is it a good idea to consolidate debt into a mortgage?

Consolidating debt into your mortgage can be a good idea if the interest rate is lower on your mortgage compared to your smaller debts. However, to make it worthwhile, you need to consider the total cost of the loan — a lower interest rate only provides a benefit if the debt is paid off within the same time frame. Smaller, higher interest-rate consumer debts are usually paid off over 1-2 years, whereas a home loan can take 25-30 years. While the interest rate is usually higher on a personal loan, the loan term is much shorter, so the effects of compounding interest do not inflate the cost of borrowing as much over time.

Is it worth refinancing to pay off debt?

Depending on your financial situation, refinancing your home loan can help you pay off debt. By refinancing you can release equity in your home and leverage it to pay off smaller consumer debts or upgrade your home with renovations or appliances. However, refinancing may not be the best option if it adds more years to your mortgage term.