In the aftermath of the festive season, there’s one thing that many Aussies are left to grapple with: debt. If you’re feeling the sting of a weighty post-holiday credit card statement, it may be worth adding ‘mortgage debt consolidation’ to your list of new year’s resolutions.
Mortgage debt consolidation is the process of rolling all of your debts into your mortgage. That way you only have one loan, and one interest rate, to worry about. There are a number of advantages and disadvantages to managing debt this way, but it does require some diligence on your part to make it work.
Advantages of mortgage debt consolidation
Ease of management
Paying a single bill each month is undoubtedly easier than paying several. It means you have just one payment, and one creditor to deal with. People often find that dealing with just one fortnightly repayment helps them to feel more in control of their finances.
Rather than managing competing due dates that require you to have cash available at the drop of a hat, you can simplify the process with a single, regular repayment. This can make it easier to manage your cash flow, and unlock the ability to make extra repayments on your mortgage.
Lower interest rate
Roll your debt into your home loan and you’re essentially applying your mortgage interest rate to all of your debts. Home loan interest rates tend to start around 3.50% p.a., while interest rates on credit cards or personal loans can be as high as 20% p.a..
This table indicates the kind of reduction in interest payable per annum (pa) that consolidating multiple debts under a single interest rate may unlock over one year.
Figures in table are indicative only, calculated (pa) per annum, without accounting for repayments.
As you can see, consolidating all of the debts under a single interest rate reduced the interest payable by $1,250 over the year.
Get a fresh start
Consolidating your debt isn’t the same as wiping it out, but it can still feel like a fresh start. You can use this momentum to jump-start a new financial approach for the new year.
Disadvantages of mortgage debt consolidation
Debt consolidation can be little more than a temporary fix if you’re not able to follow through by changing your behaviour. Once you’ve cleared your credit card of those Christmas purchases, it can be tempting to swipe it again!
It’s important to remember that your debt hasn’t disappeared, but is now part of your home loan.
Rolling external debts into your mortgage means that you’re making the principal loan amount larger. By increasing your loan amount, you’ll naturally have higher repayments.
Depending on your interest rate, these repayments should still be lower than they would be if you kept your debts separate, but it’s still important to make sure you’re able to pay your bills on time.
Extend your repayment period
Home loan terms tend to be much longer than those of other loans, like personal loans or car loans. For example, rolling a five-year personal loan into a 30-year home loan could stretch out the life of your loan, resulting in higher interest payments over time.
The best way to avoid this is by taking advantage of the reduced interest repayments by making extra repayments on your home loan, instead of the minimum required amount.
Should you consolidate debt and refinance?
Consolidating your debt into your mortgage can be a springboard into a responsible financial year, especially if you’re prepared to make extra repayments when possible. In fact, many homeowners take things a step further by using consolidation as an opportunity to refinance their home loans.
If you haven’t compared home loans in a while, there’s a possibility that you could switch over to a better deal with a lower interest rate. With the rise of neobanks and non-bank lenders, more and more mortgage holders are finding lower rates where they couldn’t before. This has the potential to reduce your regular home loan payments, making it even more advantageous to roll your debts together.
Curious about whether debt consolidation could help you save? Book a chat with one of our friendly brokers. They’ll work with you to come up with a plan that could help you save money not only on your mortgage, but also help you manage any other debts from that holiday hangover.