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Refinancing To Consolidate Debt

Kevin Gomer
15 Feb 2017

There are many reasons you might decide to refinance your home loan – debt consolidation is just one of them. Here we will take a look at how refinancing works to consolidate debt, the reasons you might choose to go down that route and the steps to take for successful debt consolidation.

Refinancing Works to Consolidate Debt

  • Usually, this means cancelling your current home loan and setting up a new one that will include your other loans and debts (such as credit card bills, car loans, personal loans, student loans etc.).
  • Consolidating your debt can save you money on interest because home loans generally have lower interest rates than personal loans and credit cards.
  • However, refinancing to consolidate debt is not a silver bullet – it’s not the right step to take in all cases and won’t always save you money.
  • Make sure refinancing makes financial sense for you. The cost of setting up a new loan (including fees, costs and interest) must work out to cost less over the long run than continuing to pay your debts in your current set up.

Benefits of Refinancing to Consolidate Debt

  • By repaying all of your debts in one, single monthly loan payment, it’s easier to stay on top of all of your debts.
  • Home loans offer fixed interest rates, variable interest rates, or a combination of both. In general, the interest rates on home loans are lower than those on credit cards and personal loans.
  • Refinancing also gives you the opportunity to refinance your home loan to one with a lower interest rate, saving you money on interest.
  • Debt consolidation through refinancing your home loan allows you to access the equity in your home, and to pay it off at a lower interest rate.

Potential Risks or Drawbacks of Refinancing for Debt Consolidation

  • Consider the situation carefully. There are a number of fees that may apply to refinancing and debt consolidation that will only serve to grow your debt in the long run:
  • Interest rates – If you have a fixed rate mortgage and the current market would allow you to lower your rate, you might be better off. However, there is always the potential to end up with a higher interest rate than your initial loan.
  • Lender fees – Exit fees may be associated with paying your existing home loan off early, and establishment fees, application fees, penalty payments and valuation fees are likely to be a part of establishing your new loan.
  • Government fees – In addition to what your former and new lenders might charge in fees, the Aussie government may also charge exit fees, or new loan fees, including stamp duty.

Refinancing is not right for every person or every financial situation, and can often lead to increased debt or a longer mortgage term than you started with. It is important to work with a broker or a qualified financial planner to assess your situation. Nicheliving Home Loans is a trusted and responsible broker – offering free advice.


Steps to Debt Consolidation through Refinancing

First, consider the following options:

  • Talk to a trusted broker or financial planner who can help you by crunching the numbers and then advise you whether refinancing is a good option for your financial situation.
  • Refinance or Redraw? If it is an option on your current loan, choosing to redraw from your current mortgage might save you more money in the long run, and allow you to pay off your other debts now without refinancing.
    If refinancing is still for you:
  • A broker will be able to assess your current financial situation, and find the best deal for you.
  • Talking to a broker allows you to better understand the fees involved with refinancing if you work with a professional, so you can make an informed decision.
  • Working with a broker means that you can have a professional prepare your paperwork, ensuring there are no errors, and submit it to the lender of your choice.
  • Once your loan has been conditionally approved, your property will need to be valued to determine the loan amount and to work out the equity.
  • When the loan has been approved by the lender, the paperwork can be drawn up by solicitors.
  • The solicitors will forward papers to your current lender, so that they know you will be discharging your loan.
  • The solicitors will contact your current loan holder to arrange a time to pay off your old home loan.
  •  Next, the loan will be booked for settlement, and your new lender can release funds to pay your previous mortgage and any other debts you have chosen to bundle into your home loan.

How Can Nicheliving Home Loans Help You?

Get in touch to arrange a free-of-charge, no-obligation consultation to get a more in-depth insight into your financial situation and if refinancing is the right option for you to consolidate debts.