Is debt refinancing and consolidation right for you?

The current interest rate environment might be prompting you to consider refinancing or consolidating your debts in the hope of fixing or lowering your monthly repayments. You aren’t alone.

In the month of July 2022, it’s been reported that nearly $18 billion in loans were switched to alternative lenders with “cheaper” rates. The key point here is to make sure that your refinancing deal, which might look attractive on the surface, doesn’t end up costing you more overall.

Here are a few points to remember should you decide that refinancing or consolidating your debts are worth exploring:

1) Fees

Changing lenders is unlikely to be a free service. Be aware that your existing lender may charge a fee for preparing documents to pay out your current loan/s. In addition, there may be hefty application fees to the new lender, not to mention property valuation fees and government charges to register a new mortgage. These fees may add up to thousands of dollars, taking the edge off what may initially seem like a good deal.

2) Consolidating personal loans

Debt consolidation is not necessarily a bad thing to do, but it’s easy to delude yourself. For example, consolidating a 5 year personal car loan into a new longer term year mortgage (say, 25 years) may achieve a lower overall monthly repayment, but it will almost certainly cost you a lot more in the long run. Even with a lower interest rate on the consolidated mortgage than on your initial car loan, given the fact you’ll now be making repayments over several decades, you’re likely to end up paying for the car twice….not to mention that the car is unlikely to be in great condition in 2047 when (at last) you’ll be driving it debt free!

3) Starting Over

Think carefully before you take out a new mortgage over, say 30 years, when you’ve got a much shorter period left on the current mortgage. Certainly, doing this may lower your repayments, but hanging in there with the current mortgage and keeping up the repayments is likely to save you more money in the long run and you’ll end up with an unencumbered house a whole lot sooner.

4) Fixed Rate Mortgages

Fixing part or all of your interest rate has its attractions, but remember that when you do, you may be forgoing the flexibility of your current variable rate home loan. Many fixed rate loans do not have a provision allowing you to increase repayments or pay off the loan in full before the end of the term. If your financial circumstances change and you decide to do so, you may be charged substantial fees and penalties.

5) Talk with your current lender

Don’t assume that you need to move to another lender to get a better deal. If you’ve been a good customer, your current lender is likely to go out of its way to keep you. As a result, it is anticipated you will minimise the fees and inconvenience that go with changing lenders midstream. And remember that ADF members are highly desirable customers for lenders, given your regular fortnightly income and employment security…so don’t be reluctant to ask questions of your current lender and make sure you let them know that you are prepared to move elsewhere if the new deal isn’t good enough.

6) Compare like with like

When considering your options, be aware of the features of various loans to ensure you are comparing like with like. Loans that are loaded up with features sound attractive, but can be more expensive. Therefore, it’s important to think about whether you need facilities such as a split rate option, an offset account, a re-draw facility and the potential for a repayment holiday. Ask lenders to give you a fact sheet outlining the key features of their offerings. That way, you’ll be in a much better position to compare loans and choose the one that’s right for you.

7) Getting advice

The points in this article are just some of the key areas to consider when consolidating and refinancing. There’s no getting away from the fact that the task of comprehensively assessing your options can be complex. Therefore, we encourage you to do your own homework by talking with a range of lenders and consulting independent education sites such as our website and Money Smart.

However, seeking advice from a licensed mortgage broker may also be a good move. Before you do so, we recommend that you understand the role of brokers and how they are paid. You can read more about using the services of a mortgage broker on the Money Smart website.

This article is a general guide only. It must not be treated as personal financial advice. Each person’s circumstances are different.