Refinancing and consolidating debt are common financial strategies to simplify debt management and to save money.
Refinancing involves taking out a new loan to replace an existing loan to pay off existing debts, usually at a lower interest rate or on more favourable terms. Whereas debt consolidation involves combining some or all your debts into a single loan to pay down through one repayment, typically with a lower interest rate and a longer repayment period. This can help borrowers stay on track with multiple repayments with different interest rates and avoid late fees/charges due to cash-flow pressures.
The key points to know about refinancing are:
- Refinancing is paying out your current home loan through getting a new loan.
- It can be with the same lender or a new lender.
- It can be for a new term length. A shorter loan term means paying off quicker; or a longer term can mean reducing the interest component of repayments to free up cash flow.
- It can be to change up the structure and packaging (splitting, fixing, account offsets etc.).
- It can be to get a lower interest rate and to access property equity in a home loan.
- It could be just to get your “ducks in a row” by consolidating debt.
While refinancing may mean paying more in interest over the life of the loan, it can provide much-needed financial relief or give borrowers an advantage in being able to access funds. If refinancing or consolidating debts is primarily motivated by solving immediate cash-flow pressures, ASIC's Moneysmart website offers some good advice about how to get on top of your expenses. For example:
- Know your debt. Write down all your debts, the interest rates attached, and monthly repayments. This will give you a clear picture of your current financial commitments.
- Work out what you can afford to pay. Update your budget by ensuring all expenses are captured and categorise them into needs and wants. Decide which expenses cuts are realistic and how they improve what you can contribute to future repayments.
- Consider the options available to you. If there is a particular utility bill that’s creating cash-flow pressures, consider if bi-annual or monthly terms would lessen the pressure. Also consider asking for payment extensions or asking for financial hardship assistance.
- Talk to your credit card providers. Ask your credit provider if they can change your repayments due dates, amounts, and any fees attached. The National Debt Helpline website outlines how to negotiate payment terms.
All lenders have financial hardship programs to help borrowers in tough times. Getting a hardship variation may be available to reduce or pause repayments for a specific period or to change another aspect of how the loan works.
This is why your relationship with your Get Real Finance broker is so important. We can assess your overall position and explain your options so you can understand what it means for the short and long term. Beyond looking at refinance and consolidation options, we can advocate for you with your existing lender to help you get any hardship assistance or to use any loan features—like ‘parental pause’ or switching to interest only. As your broker, we have a detailed working knowledge of loan products and features. We just need our clients to book a call or meeting with us and tell us what’s going on so we can help.
Regardless of whether refinancing or consolidating debts for one or more benefits, borrowers must consider all the costs related to the process. Particularly when extending loan terms to get lower monthly repayments, borrowers must understand they will pay more interest over the life of the loan.
Other key costs and risks associated with refinancing and consolidating debt are:
- Lenders may charge penalties for paying off original loans early.
- Application fees, legal fees, valuation fees, and stamp duty may apply if the new loan is secured against your home or other assets.
- Refinancing comes with fees, such as exit fees from your current loan and setup fees for the new loan.
- Risk of further debt. After consolidating debt, some borrowers become tempted to use credit cards or take out new loans, which can put them in a worse financial situation.
- Secured vs unsecured debts. If you consolidate unsecured debts (like credit cards) into a secured loan (like a home loan), your home is more at risk in the case that you can’t make repayments.
Again, your broker at Get Real Finance will calculate whether the savings from refinancing or consolidating debts will outweigh the costs relevant to each client’s situation. It’s also important to flag that refinancing impacts credit scores, at least in the short-term of switching to a new loan.
Disclaimer. This article is general in nature and does not constitute financial advice. Always consult a professional for advice tailored to your individual circumstances.
