How to consolidate your debt into a home loan, reduce your outgoings and save

Toni Mladenova
Feb 3, 2021
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

If you are juggling a number of debts - like a credit card, car loan or personal loan payment, did you know you could combine them all into your home loan? 

The practical advantage of this process - debt consolidation - is that it simplifies your life by only making a single on-going repayment and could also help you save by paying a lower overall interest rate. But you need to know the implications of doing this, as some financial products may have conditions or penalties which could make the debt consolidation process more complicated. 

Read our guide to understand what debt consolidation is, how it works and if it suits your financial circumstances. This will help you answer common questions like:

  • What is debt consolidation?
  • Why debt consolidation? 
  • Is debt refinancing right for me?
  • How do I qualify for a debt consolidation home loan?
  • How much debt can I consolidate?

Let’s begin by defining what debt consolidation is. 

What is debt consolidation?

Debt consolidation - also known as refinancing - is the process of combining a number of different loans into a single debt. 

You can consolidate your outstanding debts - like what you owe on a credit card - into a new loan to help improve your finances and better manage your repayments. This is a sensible option if you are struggling to manage multiple payments or want to benefit from a single, lower interest rate. The most common types of loans to refinance and consolidate include:

  • Personal loans
  • Credit cards
  • Car loans
  • ‘Buy Now, Pay Later’ services like AfterPay and Zip
  • Current account overdrafts
  • ATO tax debts

You can also refinance your debts and consolidate them into a home loan or mortgage.

Refinancing your home loan to consolidate debt

The major benefit of this is that the interest rate on a home loan is likely to be lower than the rate you'll pay on other types of loans.

Not all lenders offer debt consolidation home loans. The good news is that we do! 

Our home loan’s interest rate will typically be much lower than the interest you would pay on a credit card, car loan or personal loan. Switching to one single loan with a lower interest rate may reduce your repayments and mean you’re paying less in interest and fees.

Why consolidate your debt?

There are some compelling reasons to consolidate all your debts, such as:

  • Simplifying your finances by combining multiple loans into one
  • Refinancing the high interest rate debt into a lower interest rate product 
  • Reducing your repayments and monthly outgoings
  • Improving cash flow and short term savings
  • Reducing financial stress, especially with the high interest rate some credit cards charge

Now let’s see if a debt consolidation loan makes sense for your financial circumstances. 

Debt consolidation considerations: is it right for me?

Like any financial commitment you need to make sure it's important you weigh up the pros and cons of debt refinancing to make sure it makes sense for you financially.

The first step is to work out what costs there are associated with moving your existing loans, including early termination fees, application fees and any lender charges to make the change. There may also be government fees to exit your current home loan, as well as the set up costs for the new loan provider. If you are refinancing a variable home loan there are typically no early termination fees for these, but there could be break fees for switching from a fixed term home loan.

You can refinance to a lower rate but if you refinance the loan to a much longer term, you might end up paying more interest over time. You could also incur lenders mortgage insurance (LMI) costs if the increase on your loan means you exceed a loan to value ratio (LVR) of 80%.

Another big picture consideration is that if you are converting unsecured debt - like credit and store cards - to secured debt against your home, this has implications if you fail to make repayments. Secured debt requires you to put up your home as security against the loan.

The bottom line is that if the new loan works out to be more expensive than your current situation, consolidating your debts may not be worth it.

Now let’s detail what you need to qualify for a debt consolidation home loan.

How do I qualify for a debt consolidation home loan?

Lenders will be looking for a number of criteria when they assess your application, including:

  • Good repayment history of your loans over the past 3 months
  • Good credit history
  • Ability to service the new loan
  • Sufficient equity in your home, up to 80% LVR; otherwise you will be liable for LMI 

You can check your credit score for free from any online credit score provider, usually within minutes. This consists of a record of the amount of money you’ve borrowed, how many credit applications you’ve made and if you pay on time.

Yard can provide loans for up to 80% of a property’s value without Lenders Mortgage Insurance. For example, if a property has a value of $1 million, we may lend you up to $800,000. Yard can lend up to 95% of the property’s value with Lenders Mortgage Insurance for owner-occupied properties.

Tip: Use our online calculator to work out how much you could borrow, and we can also help you explore all your options.

Now let’s look at how much debt you could potentially consolidate.

How much debt can I consolidate?

Lenders have limits on the amount of debt you can refinance.

This is typically based on the amount of equity you have in your home. Lenders might also have a limit on the number and value of debts you can consolidate or combine in the new home loan. Depending on the lender you can often combine up to five different debts.

Let’s take a look at a real world example to help understand how debt consolidation works. 

Case study: How debt consolidation or refinancing works 

Our real world example assumes you still owe on your mortgage, with an outstanding personal loan and car loan, an LVR of under 80%, with the minimum repayments you would be expected to make.

Debt Interest rate Loan amount Monthly repayment
Home loan 3% over 20 year term $150,000 $832
Personal loan 15% over 7 year term $30,000 $579
Car loan 7% over 5 year term $10,000 $198
Total $190,000 $1,609

Assuming a lender agrees to consolidate the $30,000 personal loan and $10,000 car loan into your home loan at the same interest rate of 3% over the same term of 20 years, your monthly repayments would now be $1,054 - for a monthly reduction of $555

Minimise debt and develop good financial habits  

If you are carrying debt - like a credit or store card - it could make sense to consolidate it, but you should also try developing good financial habits. This means getting organised, disciplined and: 

  • Track all your spending 
  • Pay off the debt with the highest interest rate first
  • Cut costs where you can, like any luxury expenses
  • Set up a dedicated high-interest savings account or term deposit
  • Make automated monthly or weekly payments into this account

Changes to your lifestyle - such as moving back in with family to avoid paying rent, or switching your car for public transport - can all help you save. Remember every little helps.

Ready to explore your debt refinancing options with us? 

Next steps: how do I get started? 

Wondering how to refinance your home loan

With Yard it's a simple, three step online application you can complete anytime, from any device. Then one of our home loan consultants will call you within 24-hours to talk you through the rest of the application process. They will let you know what supporting documentation is required as part of your application. 

Step 1
Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.

Step 2
Design your loan: Design the features of your loan to match what works best for you.

Step 3
Get approved! When all of your details check out, we provide you with the decision on your loan!

We then settle your loan and you can enjoy living with less debt!

Have any questions about consolidating your debt? We’re here to help, and are available to chat at a time that suits you.

Want to learn more?