Consolidating your debt - the right way

By Nila Sweeney

Consolidating your credit card debt, car loan or personal loan into your mortgage can be an effective way to reduce your repayments - provided that you restructure your debts the right way.

Generally, the main reason people consolidate their debts is to reduce the amount of interest their paying.

But many borrowers make the mistake of restructuring their new debt the wrong way, says Trent Bartels, director of – and as a result, they can end up paying more interest in the long run.

“When homebuyers are looking to purchase a property, they’ll often finance their home loan over 30 Years. A common mistake we see when clients want to restructure their debt for their credit cards, car loans or personal loans is that they also finance it over 30 years,” Bartels explains.

“Generally when you decide to finance something, it’s a good idea to structure the length of the loan to match the life cycle of the item. For example, if you purchase a car you might structure the financing over five years, because at the end of the five years you may consider selling the car.”

If you were to structure the financing for your car over 30 years, it means that if you sell the car in five years time, you’ll actually end up holding onto the debt for an additional 25 years – which dramatically increases the overall interest you’re paying for the car.

“We recently had a client that came to us wanting to refinance their existing home loan, and they were looking to consolidate a credit card debt of $7,500 and a car loan of $23,000 at the same time,” Bartels says.

“Initially, their friends had advised them to consolidate the debt directly into their home loan when refinancing, which would have meant they were financing this debt over 30 years. The advantage for our clients was that it reduced their overall monthly repayments substantially, as they only had one mortgage payment to make.

“We sat down with them and when we explained that they would be paying for their purchases on their credit card or for their car for the next 30 years, they soon realised that this wasn’t the best way to structure their finances!”

Bartels came up with a plan that allowed his clients to refinance their home loan, consolidate their debts and reduce their overall monthly payments – but without paying unnecessary extra interest in the long term.

“We recommended that they take out two separate loans – one for their home loan, and the other to consolidate their credit card and car loan debt into a more appropriate term, which ended up being five years,” he says.

By doing this, they restructured all of their personal debts into one easy monthly payment, and reduced their exposure to the high interest rates that were payable on their credit cards.

The final step was for the client to cancel their credit cards, to ensure that they didn’t rack up a fresh debt on their cards, and end up exactly where they started. After all, as Bartels says, “The last thing that we want is for our clients to clear their credit card debt, only to have them spend back up to their limit again!”

Disclaimer: This article is not to be taken as financial advice. Every applicant’s personal situation will vary significantly and we would recommend that you sit down with an expert from Finance in Sydney before making any decisions. All loans are subject to the normal lending criteria.