What changes, in numbers
Take $45,000 across a card at 20 per cent, a car loan at 9 per cent over four years and a personal loan at 12 per cent, together costing about $1,500 a month. Rolled into a home loan at an example 6.50 per cent, the same $45,000 costs about $285 a month over 30 years, or about $510 a month if the extra is paid down over ten years. The refinance calculator works your own figures, with the switching costs counted.
The saving in the monthly figure is real. The total interest depends entirely on the term: $45,000 at 6.50 per cent over 30 years costs about $57,000 in interest; over ten years, about $16,000. The structure below is about keeping the second figure.
How a lender assesses it
- Equity. The new loan, including the consolidated debts, needs to sit within 80 per cent of the valuation to avoid mortgage insurance; some lenders go to 90 per cent for consolidation with LMI. The equity calculator shows the room.
- Serviceability. The new, larger home loan is assessed at the buffered rate. Because the consolidated debts drop off the expense side, capacity often improves even as the loan grows.
- Conduct. Lenders look at the last three to six months of statements. Debts paid on time are routine; a pattern of arrears, or cards at their limit month after month, draws questions and some lenders cap how much consolidated debt they accept.
- Purpose. The debts are paid out directly at settlement, not handed over as cash. Most lenders also expect the cards to be closed or reduced, and some make it a condition.
The structure that keeps it working
- A separate split for the consolidated amount. The home loan stays as it was; the consolidated debts sit in their own portion, over a shorter term or with repayments set to clear it in five to ten years. The purpose of each loan stays visible.
- Repayments set to the old total, or close to it. If $1,500 a month was going out before, keeping $1,000 going to the consolidation split clears it in about four years and leaves $500 a month in hand.
- Cards closed or limits cut. The lender assesses a card at a percentage of its limit whether or not it is used, and an open limit is the usual way a consolidation undoes itself.
When it is not the answer
Where the equity is not there, a consolidation cannot be secured against the home; a personal loan at a lower rate than the cards, or a negotiated arrangement, may be the better route. Where the debts arose from income that has since fallen, the home loan assessment will show that first. And where the home loan is on a fixed rate, the break cost has to be weighed; the fixed rate expiry page sets out when it is small.
Consolidation lowers the rate and the monthly figure; the term and the closed cards are what decide whether it lowers the cost.