Australians are generally very comfortable with debt. When the Reserve Bank started keeping records in 1977, Australian households, on average, had debt equal to about one-third of an annual after-tax income. Today, the debt-to-income ratio is about 150 per cent.
 
But it’s very easy to let your debts spin out of control and before you know it, you’re trying to pay off your car loan with your credit card while the interest bill on your card rises steadily higher. One way to organise your debts is to consolidate them into the loan that has the lowest interest rate – typically this is your home loan; your credit card debt tends to attract the highest interest rate. This way you only have one repayment every month to worry about. 
 
How debt consolidation works
 
Debt consolidation works by rolling all your debts into your home loan. So rather than having a number of different debts like personal loans, credit cards, you have one loan to cover them all. Being at a home loan rate, you are likely to be liable for less interest charges than you would have previously been paying on these debts. And with repayments happening over a far longer period, your monthly payments would be much lower.
 
There are a number of advantages to debt consolidation:
  • Lower rate of interest payable. The interest rates charged on credit cards, store cards and personal loans are usually significantly higher than your mortgage interest rate. By consolidating your debts into your home loan, the interest savings can be huge.
  • Longer loan term. As the term of a home loan is longer than that of other types of debt, your monthly repayments would be significantly lower 
  • Better security. Your lender tends to offer better security over debt in terms of the title of your property. 
  • Savings on fees and charges. Most credit cards and personal loans incur fees and charges. Consolidating your debts under one loan will save you paying multiple fees and charges.
  • One repayment. Consolidating saves you the hassle of having to pay multiple bills or manage multiple direct debit repayments. 
  • Easier to track payments. As there’s only one debt to manage, it’s easier to remember due dates and keep a track of payments.
The following table highlights the savings you can make if you consolidate your debts into one.

Scenario 1: Before consolidating your debts

Type of loan Amount outstanding Interest rate Monthly repayment
Home loan
$210,000
4.99%pa $1,126
Car loan/ lease $24,000 9.00%pa $498
Credit card 1 $15,000 17.00%pa $373
Credit card 2 $6,000 15.00%pa $143
Personal loan $18,000 12.00% $474
Total $273,000   $2,614

Scenario 2: After consolidating your debts into your home loan

Type of loan Amount outstanding Interest rate Monthly repayment
Home loan $273,000 4.99%pa $1464

Monthly repayments reduced by: $1,150

If you do decide to consolidate your debts, then you need to make sure you have the capacity in the loan to do so. You may need to have your property revalued and this can take time and cost additional fees, so check with a lender first.
 
If your home loan runs over a 25 to 30-year term and you consolidate your other debts into it, you will be paying these debts off over the same period. To avoid this, one strategy is to maintain the same amount of payment that you’ve been making on all your debts in order to pay the debt off more quickly, and thus saving thousands of dollars in repayments. In the above example, if you were to consolidate debts into your home loan at 4.99%pa, but continue to make repayments of $2,614 per month, you would save nearly 15 years and over $115,000 in interest!
 
After you consolidate your loans, it is a good time to re-do your budget and perhaps consider cutting up your credit cards, especially if you lack discipline. One factor that contributes towards carrying too much debt is ill-disciplined spending patterns so it’s not a great idea to consolidate your debts and then carry on spending like before. Otherwise you may get to a point where you never pay your mortgage off.
 
Borrowers should consider that whilst consolidating existing consumer loans into a home loan may reduce the combined monthly repayments of current consumer loans, the overall interest cost of the existing consumer loans may increase depending on the overall term of the consolidated loan compared with the current individual loan terms and interest rates applicable to any consumer loans being consolidated. iMortgage recommends that borrowers seek independent financial advice before proceeding with any action to consolidate their loans.

iMortgage provides Australians with low rates and flexible, convenient online mortgage solutions, combined with personal service. www.imortgage.com.au

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Will Keall

Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.

Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.

A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”

Will is a cricket and football tragic, who also enjoys running.

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