Common Mistakes When Consolidating Debt Into Your Home Loan

Consolidating debt into your home loan can lower your monthly repayments, but it can also leave you paying more interest overall. For Navy members, the key is to check the total cost before you sign, not just the new repayment.

The idea is straightforward. You refinance your home loan, add your car loan, credit cards or personal loan to the balance, and pay one repayment. Done well, it can improve cashflow between deployments. Done badly, it stretches short-term debt over a very long time.

Mistake 1: Judging the Deal by the Repayment Alone

A lower repayment does not always mean a cheaper outcome. Moving a car loan into a 30-year mortgage can cut your monthly payment while increasing the total interest you pay on that car.

ASIC's guidance says that if repayments fall only because the term is longer, the borrower will pay more interest over that term and should be told so. Ask your broker to show you the total cost of the new loan next to the total cost of your current debts.

Consider a sailor with a $20,000 car loan and $10,000 on credit cards. Using an illustrative rate of 6.75% p.a., adding the $30,000 to a home loan with 25 years left gives a repayment of about $207 a month for that portion. Over 25 years, that is roughly $62,000 paid in total. Keeping the debts separate and paying them off over five years at the same illustrative rate would cost around $590 a month and about $35,400 in total.

The monthly saving is real, but the total cost is higher. The fix in this scenario is to consolidate and then make extra repayments to the loan, aiming to clear that $30,000 portion within about five years. That keeps the cashflow relief available if a posting or deployment changes the budget, while limiting the extra interest. The trade-off is that you must stick to the extra repayments, and the figures above are illustrative only.

Can You Refinance to Consolidate Debt?

Yes, you can usually refinance your home loan to add other debts, if the lender agrees and you have enough equity. The lender will assess your income, expenses and the value of your home.

Lenders must check that the loan suits your needs and that you can meet repayments without substantial hardship. They also assess new borrowers at a rate at least 3 percentage points above the loan rate. If you plan to release equity to pay out debts, the lender will want a property valuation and a clear picture of what you owe. Borrowing more also means a higher loan amount, which can affect whether lenders mortgage insurance applies if your equity is under 20 per cent.

Mistake 2: Ignoring the Costs of Switching

Refinancing can come with costs that cancel out your savings. These can include a break fee if you leave a fixed rate early, a discharge fee, an application fee, and possibly lenders mortgage insurance.

Exit fees on most home loans signed since 1 July 2011 are prohibited, but break fees and discharge fees are not. Amounts vary by lender, so ask for them in writing. If your fixed rate period is ending soon, waiting may avoid a break fee. A fixed rate expiry calculator can help you see what happens next.

Savings also need to outweigh any broker fees. Under the law, brokers must act in your interests and weigh up whether a refinance is worth the expense. Sometimes the right advice is to stay put.

Mistake 3: Consolidating and Then Racking Up New Debt

Consolidation only helps if the old debts stay at zero. If the credit cards are paid out and then used again, you end up with the larger mortgage and new card balances.

A practical step is to lower or close the card limits once they are cleared. If your costs are irregular, it helps to build a buffer. An offset account can hold spare cash while reducing the interest charged, though some loans with offset accounts carry a higher rate or an annual fee. A redraw facility can give access to extra repayments, but it may make it easier to spend money you meant to put towards debt.

Mistake 4: Forgetting What the Tax Office Says About Interest

Interest on a home loan is not tax deductible just because the loan is secured by your home. For a home you live in, interest is generally not deductible, so consolidating personal debts will not create a deduction.

If you also own an investment property, the rules are different. The Tax Office says deductibility depends on what the borrowed money is used for, and mixing private and investment borrowing can mean interest must be split. If this applies to you, see the page on investment loan refinancing and speak to your accountant before you restructure anything.

Mistake 5: Not Checking Whether You Are Paying Too Much Already

Before you consolidate, check whether your current home loan rate is still suitable. A rate review can sometimes save money without adding any new debt to the loan.

If you are on a loan from the 5% Deposit Scheme, be careful. The scheme guide says that you cannot increase the loan amount if you want to keep the benefit of the scheme, and that borrowing extra from the lender ends the cover. Consolidating debt into that loan would change that. A loan health check can show where you stand, and a look at getting a lower interest rate may be enough on its own.

If you are comparing options, use the borrowing capacity calculator to see how a larger loan could affect what you can borrow later.

Defence Loans works with ADF members every day and understands the way service life affects income, postings and timing. Call one of our team or book an appointment at a time that works for you, and we will run the numbers on your debts before you decide.

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