Why you can’t consolidate debts into a new home loan

Feb 5, 2015 |

We are regularly asked by home buyers to find them a lender that will allow the buyers to build in outstanding debts into a new mortgage. There is no such possibility for someone who is looking to buy with a limited deposit as in trying to consolidate other debts into a mortgage you will effectively need to borrow close to 100% and possible over that. Unfortunately no deposit home loans are simply not available. Any debt consolidation that you need to do will take your mortgage over the edge in terms of the amount being lent as a percentage of the property value.

Insufficient security for lender

Remember that a mortgage is a secured finance product. Lenders will only be prepared to lend a percentage of the property value. No one will be prepared to lend 100% or more. That would take the loan into the unsecured lending environment. Therefore when considering whether you can consolidate other debts into the mortgage, ask yourself how large will your mortgage be in relation to the property value. Maximum loans available today are to 97%. These require full financials and a perfectly clean credit history. If your credit history is leas than perfect than a deposit of 10 – 20% may be needed.

Loan LVR can not be increased past the lender limit

LVR stands for “Loan to value ratio”. This is the percentage of your loan amount over the value of the security property. Loan of $400,000 over a property of $500,000 is representative of 80% lvr. Lenders have their loan lvr limits set based on borrower circumstances and property type. For example an apartment in a high rise building in the city may have a maximum lvr set to 70% whereas one in the suburbs to 95%.

Also borrowers with impaired credit history can not borrow more than 85% or possibly lower depending on person and property. Similarly low doc self employed borrowers need to offer a larger deposit and have a lower lvr than PAYG borrowers.

Consolidation only available with mortgage refinance

Mortgage refinance can offer the opportunity for additional debt consolidation if you hold sufficient equity in the security property. As an example your home is worth $350,000 with a mortgage of $250,000. You should be able to comfortable refinance and add in other debts of $25,000. That would bring your overall loan to $275,000 secured by a property worth $350,000, being 78.5% lvr. Naturally no consolidation would be possible if you were trying to consolidate other debts into a mortgage of $340,000, as your existing loan is already over 95%.


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