Should mortgages be used to consolidate debt?

• What is a debt consolidation loan?
• Is debt consolidation an option for HELP/HECS debtors?
• Should I consolidate my debts?

With rising interest rates, some people are turning to credit cards, personal loans, and buy-now-pay-later services for unbudgeted spending. Although this may provide a short-term solution, it is not sustainable as the cost of these debts can be staggering, with interest rates ranging from 14% to 24%.

However, individuals with home loans could have an advantage if they have other forms of debt, including credit cards, personal loans, and possibly even HELP/HECS debt. This is because mortgages offer an opportunity for debt consolidation.

What is a debt consolidation loan?

A debt consolidation loan involves combining multiple debts into a single loan. This can be beneficial for individuals with a home loan because mortgages are backed by an asset, and the interest rate on a home loan is usually lower than the interest rates on other debts. Refinancing a mortgage to consolidate debt can provide various benefits, such as lower overall borrowing costs and simplified budgeting with just one loan account and repayment.

However, it is important to consider the repayment periods and amounts when consolidating debt loans. Consolidating debt into a mortgage often extends the payment period of the credit card or personal loan. While this results in lower interest rates and monthly repayments, it can also increase the overall cost of the debt over the lifetime of the loan. Debt consolidation does not address the potentially risky behaviour that led to the debt in the first place. Before making any significant financial decisions, it is essential to not only consult a financial adviser but also reflect on one’s relationship with money.

Is debt consolidation an option for HELP/HECS debtors?

While HELP/HECS loans are “interest-free”, they are indexed to inflation, meaning that if inflation goes up, the amount outstanding on the loan goes up too.  

Inflation is currently higher in percentage terms than the interest rates on most mortgages. If this remains the case, consolidating HELP/HECS debt into a mortgage could provide borrowers with financial benefits, especially if they are prepared to pay off an amount equivalent to the HELP/HECS loan before inflation returns to normal.

Should I consolidate my debts?

If you have any form of debt, whether it is a personal loan, credit card debt, or any other debt, consider consolidating it because a mortgage may provide a better interest rate and lower repayments. 

However, it is important to proceed with caution as consolidating debt will only benefit those who are committed and have a clear goal of paying down their debt rather than prolonging it. Now more than ever, it is essential to seek advice from finance professionals such as your accountant, financial planner, and mortgage broker, as consolidating your debt is an irreversible decision. These professionals can help you maximise the opportunities your mortgage has to offer and, most importantly, avoid making costly mistakes.