Consider debt consolidation

A home loan is a big commitment in itself. But with a car loan, personal loan and credit card attached, it can be a real juggling act to keep track of monthly repayments, interest rates and outstanding balances.

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

By consolidating, you can combine multiple debts into one loan. The biggest benefit of doing this, is that you will only have one monthly repayment to manage. You can consolidate by taking out a new loan to cover the sum total of your debt, or by increasing an existing facility to cover the other amounts. Many homeowners choose to roll other debt into their home loan because of the advantages this offers, but there are some important things to keep in mind to make if this is going to work for you in the long term.

1. A personal loan

A personal loan is a great way to consolidate your debts.

You should look for a personal loan with a competitive fixed interest rate, giving you peace of mind knowing exactly how much you will need to repay as you get on top of your debts.

2. Short term vs Long term

Using a home loan to consolidate your debts essentially converts smaller, short-term loans into long-term borrowing. Unless you adjust your repayments to mirror the adjusted amount, this can end up costing you more in the long run. One of the keys to making the strategy work is to repay as much of the combined loan as quickly as you can.

3. Change your habits

If you’ve accumulated multiple debts because of bad financial habits, it’s important that you change your behaviour so you don’t end up in the same situation down the track. This may be as simple as budgeting better, or could involve hard decisions such as cutting back on spending and maybe even cutting up your credit cards. There’s no point in consolidating your debt if you only end up in a worse position as a result.

Use our budget calculator tool to work out how realistic your financial goal is in a matter of minutes!

4. The fine print

Before making the decision to consolidate your debt, ask what fees and charges apply. Are there are any fees and charges involved in taking out a new home loan, or increasing an existing facility? Will you be slugged with any new application fees, or be forced to pay for an early exit? Are there any additional fees for things such as switching from a variable to a fixed rate or making redraws?

Always ask your lender what fees and charges will apply to your new loan, and don’t pay for features that you won’t use. If any fees are charged when the loan starts, try and pay them upfront rather than adding them to your mortgage. This can save you thousands of dollars in interest over the life of a long-term loan.