Can you convert a personal loan to a home loan?

If you are juggling multiple debts, one way to simplify your finances is by consolidating your debts into a single loan. Converting from a personal loan to home loan can result in a more affordable, single loan under certain conditions.

Benefits of debt consolidation

Debt consolidation can make it easier to manage your finances and under the right circumstances, has the potential to save money in the long-term. 

When multiple debts are consolidated into a single loan, it can make repayments easier to manage. With financial discipline, some have been able to repay their money faster using this strategy.

Some other potential benefits of converting a personal loan to a home loan include:

• Your repayments may reduce if you get an affordable home loan interest rate.
• You may be able to improve your cash flow and enhance your savings.
• The stress of managing multiple loans may be reduced. 

Disadvantages of debt consolidation

Converting your personal loan to a home loan may also have certain disadvantages, such as:

• There is a risk of losing your home if you are unable to make timely payments.
• Home loans have longer loan terms than most personal loans, so you may pay more interest on your consolidated debt over the life of the loan than paying it off separately over a shorter term.
• The loan to value ratio (LVR) increases when the personal loan balance is added to the home loan, which can result in an increase of the interest rate.
• If LVR increases to more than 80 per cent of the property value, you may have to pay the additional cost of Lenders Mortgage Insurance (LMI).
• Some lenders may charge setup fees for the new consolidated home loan package.
• Increasing the mortgage on your home may limit how much of your equity you can easily access.

How does debt consolidation work?

A debt consolidation home loan may not be available to all borrowers. The lender must be confident that you are financially capable of repaying the consolidated debt while also staying in control of future borrowings to receive approval. The amount that can be consolidated varies from one lender to another.

Some factors that the lenders will assess when you apply for debt consolidation may include:

• Timely repayment of your home loan during the previous six months
• Good credit history
• Stable employment history
• No missed repayments
• Timely payment of credit card bills and personal loan instalments for the last three months
• Strong financial situation that could improve your ability to make timely payments on the consolidated debt. 

How to convert your personal loan to a home loan

The exact process of consolidating your debts into your home loan, including your personal loan, may vary depending on the lender and exact financial circumstances. The general process may require taking the following steps:

1. Collect the details of your home loan, your personal loan and other debts, and your property’s value.
2. Estimate what your LVR may be if you added your personal loan debt to your home loan. If the LVR will be more than 80%, you may need to calculate the cost of LMI.
3. Collect documentation, such as payslips and banks statements, as proof of income and expenses
4. Contact your mortgage lender about refinancing your home loan and consolidating your personal loan debt. This will require going through many of the same steps as applying for a mortgage e.g. checking your income and expenses and conducting a formal valuation of your property.
5. If approved, the lender will pay the extra cash into your nominated bank account, which you can use to clear your outstanding personal loan debt.

Keep in mind that there may be application fees and other upfront charges you’ll need to pay when refinancing to consolidate debt. Additionally, making an early exit from your personal loan could also mean paying extra charges in some cases. Check if the potential value offered by consolidating your debts would make up for any extra costs you may be charged.

For additional advice and support when refinancing, whether or not you’re consolidating debt, a mortgage broker may be able to guide you through the process and support you when making your application.

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