Why consolidate debt into a home loan?
Consolidating your debt into your home loan balance could help in a number of ways. Consolidating debt can help you:
- Streamline all your balances – such as personal loans, credit cards, car loans or Buy Now Pay Later debt – into a single debt account.
- Simplify how you manage your debt with a single repayment and one interest rate.
- Stop paying multiple account fees on different debt accounts.
- Borrow at a lower interest rate than most credit cards and personal loans.
- Potentially pay less in repayments on the debt balances you’re combining.
How does it work when you consolidate debt with your home loan?
Consolidating your debt will mean borrowing against the equity you have in your property so you can free up funds to pay out your other debt accounts. Equity is the difference between the market value of your property and the remaining balance on your home loan.
If you have equity in your home, you won’t be able use all of it at once (unless you sell your property). Your lender may calculate your usable equity as a percentage of your home equity. For example, Westpac calculates usable equity as 80% of your home equity minus the balance on your home loan. You can explore this in more detail with our home equity calculator.
A home loan increase (also called a ‘top up’) is one common way of accessing the equity in your home. It involves either increasing the balance on your existing loan or creating a separate loan that’s linked to the same property.
A supplementary loan can have different features to your current home loan, including:
- a different repayment frequency
- a new type of interest rate (such as fixed rate)
- a shorter term for your consolidated debts.
Having a shorter term for a supplementary loan could help you pay the balance down faster, meaning you might end up paying less in interest charges than you would with a standard home loan increase.
For example, let’s say you have $10,000 of credit card debt at a rate of 20.49% p.a. You also have a car loan with a balance of $25,000 and an interest rate of 9.9% p.a. In this scenario, you’d need to pay $2,049 of interest on the credit card and $2,475 of interest on the car loan each year - and that’s before you start paying off the principal, which is the amount you borrowed in the first place.
On the other hand, if you have a home loan with a rate of 2.5% p.a. and use it to consolidate these credit card and car loan balances, you’d only need to pay $875 in interest per year on those two debts combined. You immediately save $3,649 in yearly interest charges – that's more than 80% in savings every year.
In theory, you could then put those savings back onto the loan, on top of your regular repayments, which would help you to pay the balance down even faster. Note that this example is for reference only and does not factor in compound interest rates, which typically apply to all lending products.
Things to consider when consolidating debt
Consolidating debt with a home loan increase may be attractive because it could reduce your debt repayments, as your home loan is likely to be at a lower rate than say a personal loan or credit card. However, it’s important to consider the overall picture and the total costs, including any fees and repayments over the life of the loan.
To make sure it’s the right option for you, there are several things to think about.
1. More interest over time
Consolidating debt into your home loan can have the effect of extending the term, which is likely to result in more interest charged over time. For example, a 5-year car loan added to your home loan balance could extend your loan term, so you’ll be paying interest for longer.
2. Less flexibility for paying off
Adding other debt balances to your home loan means you may lose the ability to pay them off when you have the available funds. For example, you can pay off a credit card whenever you want, whereas it may be more difficult to pay lump sums off your mortgage, depending on the type of home loan you have.
3. Close other debt accounts
If you consolidate personal debts with a home loan increase, you may need to contact each lender separately to make sure you close all accounts and don’t continue to incur fees.
Work out if you might be eligible
Equity is your property value minus what you still owe on your home loan. If you’ve been paying down your home loan regularly or if the market value of the property has increased – or both – then chances are you will have equity in your home.
You need to have usable equity in your property to be eligible for a home loan increase. Keep in mind that you won’t be able to access all the equity in your property. We calculate your usable equity as 80% of the total value of the property, minus the outstanding balance of your loan. Estimate the amount of usable equity in your home by using our home equity calculator.
These calculations depend on how we value your property, rather than real estate agent valuations. We also take into account your broader financial situation, including your income, expenses and repayment history.
Is your usable equity enough to consolidate your personal debts? If it is, then you consider whether a home loan increase would be a good option for you.
Take the next step with Westpac
If you want to find out more about debt consolidation by increasing your Westpac home loan, you can request a call back from one of our Home Finance Managers.
Once your home loan increase is approved, we will use the increase amount to pay off the debts you want to consolidate – whether it’s within Westpac or, for example, a credit card debt and a car loan with separate lenders. We will then add the total amount you still owe on those debts onto your home loan balance.
Other ways to manage debt
There are some other options, if debt consolidation isn’t for you.
Refinancing your home loan
Refinancing your home loan is a different financial service to increasing your home loan.
When you refinance a home loan, it’s a whole new loan account with a different lender. Whereas a home loan increase adds to the amount you’ve borrowed from the same lender, using equity in your property as security. They are similar in that they both can help you consolidate your debts.
To sum up
- Debt consolidation rolls all your other debts into your home loan
- It simplifies your debt by giving you one, and likely reduced, repayment to meet
- Lower repayments could free up cash for other things
- You’re likely to pay more interest over the life of the loan
Choose the right option for you
Increasing your home loan is an important decision, so you should consider getting independent financial advice.
If you are a Westpac customer and experiencing difficulty making your loan or credit card repayments, please call Westpac Assist on 1800 067 497. We may be able to help in several ways:
- an extension of the loan term to reduce your repayments
- an interest rate reduction
- a short break on your repayments for a fixed period.
If you have any other questions about a home loan increase or debt consolidation, request a call back and talk to a Home Finance Manager about your options.