Don’t just roll over

Rolling debts into your home loan might not be a top idea, as Sophie Elsworth writes in this exclusive report

QUICK-fix solutions to get rid of high-interest debt by rolling it into a home loan can come at a hefty price.

While Australians continue to rack up credit card debts and take out personal loans – both of which attract rates far higher than home loan interest rates – mortgage consumers are being warned to take care before rolling any of these accrued debts into their home loans.

Consumer finance expert Lisa Montgomery said it’s easy “to be seduced” into rolling debts into your mortgage which in some cases have rates less than 4 per cent, but she warns it’s not always the best solution.

“A lot of lenders make it attractive to borrowers by saying, ‘we will take your personal loan and credit card debts and wrap them up into your home loan and you will pay less every month’,’’ she said.

“But people don’t realise that what the lender has done is they’ve taken high interest, short-term debt and put it into a lower interest rate but taken it over a longer term and the consumer will end up paying more.”

Many personal loans start with interest rates around 10 per cent while the average credit card interest rate is 17 per cent.

Ms Montgomery said the best approach to ensure debt consolidation works is to “change your behaviour”, but if you continue to rack up more card debt and take out personal loans it will leave you in a continuous debt cycle. Galaxy research compiled for InfoChoice quizzed 1000 Australians and found about three in four Australians with a home loan have not consolidated debts in their mortgage. And about 17 per cent of people did not even know they could do this. Analysis found a consumer with a $300,000, 30year home loan, paying an interest rate of 3.89 per cent and rolling the typical card debt of $3200 at 17 per cent into their loan would end up paying more money.

If the debt was added at the beginning of the home loan, the customer would pay an additional $2227 in interest over the life of the loan.

InfoChoice spokeswoman Laura Crowden said if consumers are considering restricting their debts it’s important to make sure you pay less, not more, in interest charges.

“If you have a lengthy home loan it may be better to keep other debts separate,’’ she said.

“Consolidating a short-term debt like a credit card into a 30-year loan term will mean you’ll end up paying more in the long run even if the interest rate is lower.”