Debt consolidation and refinancing

Will you be better off?

If you are struggling to manage your debts, it may sound like a good idea to pay someone to fix your credit problems and roll all your loans into one loan. Here we explain what to consider before you refinance your loans and how you can get help for free.

Consider other options before you refinance

Consolidating or refinancing loans can work for some people if it means they will pay less in fees and interest. For others, it may only be a short-term fix, especially if they can't meet the repayments on the new loan.

Before you refinance or spend money paying a company to help you with your debts, there are things you can do.

Talk to your credit provider

If you are struggling with your repayments, try to come to a new arrangement with your credit provider. See trouble with debt for information on how to do this.

Switch home loans

Changing home loans could save you money, but you need to be careful. Some mortgage brokers or lenders make a commission if they persuade you to switch loans. They may make misleading claims about how much you might save, just to sell you the new loan. See switching home loans for more information.

Sell your home

You may be better off selling your home if you are struggling with mortgage repayments. It is better to sell your home on your own terms than for the credit provider to sell it as a mortgagee sale. You may even end up with money left over to repay other debts.

Video: Becky is behind on her mortgage

Mortgage help - help with repayments video

See what happens to Becky when her relationship breaks up and she gets
a letter from her bank about falling behind on her mortgage. She decides she needs some free legal advice.

Get free financial counselling

When you are having money problems it may be better to seek help from a financial counsellor to help you sort out your money and help negotiate your debts with your creditors.  Find out how a free financial counsellor can help you.

Help from the Ombudsman

If you have tried to negotiate with your credit provider and you think they are being unfair, you can contact a free external dispute resolution scheme. Your lender must tell you which one of these two schemes it belongs to:

Check the debt consolidation loan is right for you

Compare the interest rate, fees and charges

Before you take out a new loan to consolidate your debts, make sure your new interest rate, including fees and costs, is much lower than what you're paying on all the debts you are consolidating. If you end up paying higher interest, you're losing money and making your problem worse.

Smart tip

Do not trust anyone who asks you to sign blank documents, refuses to discuss repayments, rushes the transaction or won't put all loan costs and the interest rate in writing before you sign up.

Many lenders charge penalties or costs if you pay off loans early. Because a consolidation loan involves taking out one new loan to pay off your current loans, your new consolidation loan may be secured against your home or other assets, so you may have to pay application fees, legal fees, valuation and stamp duty.

Check the loan term

Beware of longer loan terms. Even if the interest rate is lower on the new loan, paying off a short-term debt (like a credit card or personal loan) over a very long term means you will still pay more in interest and fees in the long run.

Compare different loans and loan terms. 

Personal loan calculator

Check they are licensed

If you plan to use a debt consolidation company or credit provider, make sure they are licensed by ASIC. Credit providers and brokers that are not licensed (or are not an authorised representative of someone who is licensed) are operating illegally in Australia.

Search ASIC Connect's Professional Registers to check your credit provider has been licensed or you can phone ASIC's Infoline on 1300 300 630.

Avoid refinancing traps

Refinancing can be risky if you are not careful. The Financial Rights Legal Centre explains the pitfalls of debt management firms in their video on 'Debt Dating'. View it at their website

Here are some things you should avoid when it comes to refinancing:

Getting deeper into debt

Smart tip

Avoid refinancers who make unrealistic promises about getting you out of debt or who advertise that they can help you, no matter how much you owe.

Debt consolidation can get you even deeper into debt by letting you borrow more money. For example, if you transfer your credit card balances onto your home loan, you might be tempted to put new debt onto your credit cards.

If the consolidation loan simply increases your overall level of debt, you are making your financial problems worse.

Losing your home

If you turn all your unsecured debts (such as credit card debts) into a secured debt (using an asset such as your home as security), remember that if you don't pay the new loan then you could lose your home

Dodgy lenders and brokers

There are brokers and lenders that take advantage of people who are desperate to save their home. They do this by:

  • Charging them high fees, sometimes more than 20% of the equity in their home
  • Arranging a refinancing agreement where it is extremely unlikely that the borrower will be able to afford the new repayments

This is called 'equity stripping' and has landed a lot of people in financial trouble.

A 2008 ASIC survey found that borrowers trusted brokers who told them they could arrange a loan that would save their home, and did not ask about the total costs of the refinance. Some brokers did not disclose their fees or total costs in time for borrowers to make an informed decision.

Equity stripping can be very lucrative for brokers and lenders, as they can make big profits at minimal risk. Some lenders have been known to charge borrowers 50% interest or more, and higher rates if they default on the loan.

Read our case study on equity stripping to find out how a young couple lost their home through a dodgy broker.

Here are some warning signs that your broker may be dodgy:

  • They ask you to sign blank documents or credit application forms with false information in them
  • They arrange a business loan for you when you only want a basic consumer loan
  • They do not discuss your financial situation in detail before arranging a loan
  • They do not explain fees, charges and repayments before you sign up
  • They tell you not to worry about reading the paperwork
  • They advertise that they can help you no matter how desperate your financial situation

Case study: David didn't check the fine print

Man moving out after refinancing his loansDavid was delighted with his new apartment but 4 years after buying it, he was made redundant. He began to fall behind in his repayments and worried that his credit provider would sell the apartment to repay the loan.

David approached a broker who advertised that he could help people in arrears on their loans. By the time the broker had refinanced his loan, David was 3 months and more than $5,000 overdue on repayments.

The broker and the new credit provider charged David over $30,000 in fees and costs to refinance. He soon discovered that he was paying a higher interest rate on the new loan (9.95% instead of 7%) and that the repayments were $500 more a month than on his previous loan. Within 12 months of refinancing, David had to sell his apartment. If he had sold earlier, he would have had more money.

Work out whether you will save money by switching to another mortgage.

Mortgage switching calculator

Stopping repossession of your property

Think very carefully before you sign up with a debt solution company that offers to help stop the repossession of your property. These companies sometimes use tactics to scare you into using their services, like telling you that if you don't contact them straight away you might lose your house. 

Debt solution companies may promise the world but some charge fees for services you could get for free. The truth is that they may not be able to stop the repossession of your home. Find out what debt solution companies can and can't do for you.

If your lender has threatened legal action because you are behind on your mortgage repayments, the best thing for you to do is contact an external dispute resolution (EDR) scheme immediately. The benefits of using EDR are:

  • It's a free service - You will not be charged for using an EDR scheme
  • It delays repossession - The lender cannot start or continue legal action while your matter is being considered by an EDR scheme

Here are contact details for the two EDR schemes:

If your lender has started legal action against you, EDR can only be used before the Court makes a ruling.  If judgment has already been handed down, it is too late to use EDR.  In this case, you should urgently get free legal advice.

Our behind on your mortgage webpage explains the steps a lender could take when they are trying to repossess your home.

Get free debt help

Financial counselling is a free service that you can use to help sort out your debts.  Financial counsellors are independent and confidential.

Free legal advice on your debts is also available from community legal centres and Legal Aid offices in each state and territory.

If you're having trouble paying your debts now, you stand little chance of paying back a new loan which might have a higher interest rate and added fees. Explore other options before consolidating or refinancing your loans.

Related links

Last updated: 19 Mar 2018