Debt Consolidation — Fact Sheet
Source document
This fact sheet is reproduced for general information purposes only.
It is an industry-standard explanatory document and has not been authored by Model Mortgages.
It does not provide personal advice.
Debt consolidation
Debt consolidation involves bringing your existing debts together into one new loan. The objective is to reduce the number of individual repayments you make and reduce the interest rate you are paying on higher-cost debts.
Debt consolidation may be something to consider if you are:
- managing multiple debt repayments and struggling to keep track of what is due and when
- finding that most of your spare income is being used to pay interest, without reducing debt balances
- paying high interest rates on debts such as credit cards, cash advances, or store credit
Debt consolidation strategies
There are several ways debt consolidation can be structured, including:
- moving debts to a new credit facility (such as a personal loan or mortgage) with a lower interest rate or lower fees
- extending the term of existing loans (for example, resetting a mortgage back to a 30-year term)
- changing repayment terms on an existing loan to interest-only
- using a combination of these strategies
Debt consolidation is usually implemented to make repayments easier to manage. In some cases, the objective may also be to improve short-term cash flow.
It is important to understand that debt consolidation does not reduce the total amount you owe. It simply restructures repayments. For a consolidation strategy to be effective long-term, it should be combined with changes to spending behaviour and budgeting to gradually reduce overall debt.
What’s good about debt consolidation
Simplicity
Managing one loan repayment is often easier and more convenient than juggling multiple repayments.
Potential savings on interest and fees
Consolidating high-interest debts, such as credit cards, into a lower-interest loan may reduce interest costs and fees.
Potential cash-flow benefits
Lower interest rates may reduce monthly repayments and free up cash flow, which can assist with budgeting.
Lower repayments
Reducing interest rates and extending loan terms may lower repayment amounts in the short term.
Stress relief
Some specialist lenders may consider applications from borrowers who have missed repayments or have a poor credit history.
Things to consider
Higher long-term costs
Extending loan terms can significantly increase the total interest paid over time.
For example, consolidating short-term debt into a 30-year mortgage may reduce repayments but greatly increase overall interest costs.
Increased access to credit
If cleared credit facilities are not closed, there is a risk of accumulating new debt. For example, continuing to use credit cards after consolidating their balances can worsen financial outcomes.
Concentration of risk
Consolidating all debts into a mortgage increases exposure if interest rates rise. Making additional repayments or building a cash buffer may help manage this risk.
Using up equity
Debt consolidation into a home loan may reduce available equity and increase the loan-to-value ratio (LVR).
If the LVR exceeds 80%, Lenders Mortgage Insurance (LMI) may apply, which can be costly and reduce the benefit of consolidation.
Example
If you have a $30,000 personal loan over five years at 15% p.a., the interest cost would be approximately $12,822.
If the same $30,000 is added to a mortgage at 5% over 30 years, the interest cost would be approximately $27,977.
While repayments may be lower, the total interest paid over time would be significantly higher.
Disclaimer
The information provided in this fact sheet is not legal, taxation, or financial planning advice.
It has been prepared without considering your objectives, financial situation, or needs.
All loan products are subject to lender criteria and approval. Fees, terms, and conditions apply.
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