What is a debt consolidation home loan?
A debt consolidation home loan lets you refinance your mortgage and combine multiple debts, such as credit cards, car loans or personal loans, into one loan with a single repayment to manage.
This means one interest rate, one set of fees and no need to juggle different due dates. Because home loan interest rates are usually lower than personal loan and credit card rates, consolidating can make your repayments simpler and potentially cheaper.
But spreading your debt over a longer term could cost you more in the long run. For example, if you have 20 years left on your mortgage, you’ll pay more interest on the consolidated debt over time.
How does consolidating debt into your home loan work?
Here’s how a debt consolidation home loan works:
Refinance your home loan
To consolidate debt, you refinance your current home loan – either with your existing lender or a new one. As part of the refinance, you borrow enough to pay off your mortgage balance plus the total of the debts you want to roll in (e.g. credit cards, car loans, personal loans).
Pay out your existing debts
Once the new home loan is approved and funded, your lender uses the borrowed amount to pay out the debts you’re consolidating. This typically closes those accounts – though with things like credit cards, you may need to take the extra step of closing the account yourself if you want it completely gone. Either way, you’re left with just one loan to manage.
Make a single repayment
From this point forward, you only make one regular home loan repayment instead of juggling multiple due dates, fees and interest rates. Your new repayment is usually spread over your remaining or agreed mortgage term, which can make the monthly cost more manageable.
Understand the trade-offs
Because mortgage terms are typically much longer than personal loans or credit cards, you could end up paying more in total interest – even if your new interest rate is lower. The key is to keep making extra repayments where possible to reduce the total interest cost.
Before consolidating debt into a home loan example
Meet Jade, who is managing two consumer debts outside of her mortgage. In this example, the hypothetical repayments and costs of her debts are:
| Credit card | Car loan | Home loan | Total debt | |
|---|---|---|---|---|
Balance | $10,000 | $20,000 | $500,000 | $530,000 |
Interest rate (p.a.) | 23.99% | 10.14% | 5.50% | Varies |
Time to repay | At 3% of balance, it’ll take 4 years and 8 months to repay | 4 years | 24 years | |
Monthly repayment | $300 | $509 | $3,130 | $3,939 |
Total interest cost | $6,638 | $4,413 | $401,568 | $412,619 |
After speaking with her financial advisor and mortgage broker, Jade decides it may be in her best interest to refinance and consolidate her credit card and car loan debt into her mortgage. She chooses to keep the home loan term at 24 years and aggressively pay down the added consolidated portion of debt, but she’s managed to snag a lower rate upon refinancing.
After consolidating debt into a home loan example
Now, here are the new details of Jade’s home loan after consolidating her debts:
| Debt consolidation home loan | |
|---|---|
Balance | $530,000 |
Interest rate (p.a.) | 5.19% |
Time to repay | 24 years |
Minimum monthly repayment | $3,222 |
Additional monthly repayment | $750 (for 3 years, 3 months) |
Total monthly repayment | $3,972 (for 3 years, 3 months - $3,222 thereafter) |
After consolidating her debts into her home loan, Jade’s new minimum monthly repayment is $717 lower than her combined debt repayments were before refinancing. But instead of pocketing the savings, she chooses to pay an extra $750 each month on top of the new minimum. That brings her monthly repayment to $3,972 – only $33 more than what she was paying before.
By making these extra repayments, Jade is aggressively paying down the $30,000 in consolidated debt. In the new scenario, it would take her around three years and three months (40 months) to pay it off – including interest. With the consolidated debt cleared, Jade could revert to the minimum repayment or maintain the higher repayment to clear the rest of her home loan faster.
Jade would save around $8,000 in interest on her credit card and car loan debt by consolidating them into her home loan, and a massive $165,068 in interest overall by securing a lower rate on her home loan, even if she reverts back to the lower minimum monthly repayment after 40 months.
Note: This hypothetical scenario assumes that Jade pays the same amount towards her credit card balance each month. The calculation does not factor in loan or credit card fees that may apply in either the current or debt consolidation scenario. It is based on the example details described only, and assumes Jade makes her debt consolidation home loan repayments on time every month until the loan is repaid. This may not reflect the outcome of debt consolidation in other scenarios. For simplicity, we’ve assumed the home loan interest rate remains the same for the life of the loan.
Consolidation works best with a clear pay-down plan
Debbie Hays, Money.com.au Senior Mortgage Broker
"Consolidating your debts into your mortgage can be a smart strategy if you’re committed to paying it down quickly. By using the savings from lower monthly repayments to make extra payments, you avoid stretching short-term debts over 10–25 years. I work with many clients who refinance to free up cash flow for big milestones like school fees, an investment property or simply improving their credit profile and breaking the debt cycle. I also outline what repayments on the consolidated portion would look like over 5–7 years so clients can clear it faster while taking advantage of the lower rate."
Debbie Hays, Money.com.au Senior Mortgage Broker
Pros and cons of consolidating debt into your mortgage
Pros
- It can reduce your monthly repayments and free up cash flow.
- Easier to manage one single repayment instead of juggling multiple debts.
- Clearer loan term, especially useful if you’re consolidating credit card debt with no fixed end date.
- Streamlining your debt can reduce stress and give you greater peace of mind.
Cons
- Extending short-term debts over a mortgage can cost more in the long run.
- The consolidated debt is secured against your property; missing repayments could lead to foreclosure.
- Clearing other debts may tempt you to rack them up again, leaving you worse off.
- You may face application fees, discharge fees or break costs when refinancing that reduce the benefits.
Factors to consider before consolidating debt
What is the interest rate?
Check the debt consolidation home loan interest rate against what you are currently paying on each debt. A lower rate can save you money, but only if you avoid stretching the debt over a longer term.
Total interest over the loan term
Consolidating debts into a 10–25 year mortgage can increase the total interest you pay. Make a plan to repay the extra debt faster to avoid this.
Refinancing costs
There may be application, settlement and discharge fees when you refinance. Factor in these refinancing costs to ensure the savings outweigh the expenses.
Your home as security
When you consolidate debts into your mortgage, your home is the security for the entire balance. Missing repayments could put your property at risk.
Your spending habits
If you continue to apply for credit cards or take on new debts, you may end up worse off as it can negatively impact your credit score or be viewed as a red flag by lenders. Be disciplined and avoid adding to the debt.
Loan features and flexibility
Look for features like offset accounts, redraw facilities or the ability to make extra repayments. These can help you pay down the consolidated debt faster and reduce interest costs.
Structuring your loan for smarter repayments
Another factor (and strategy) when consolidating debt into your home loan is to structure the loan in a way that gives you more control. Instead of simply increasing your existing loan amount, you can split the loan so the additional debt sits in its own separate loan account.
This allows you to isolate the new debt from your original loan and focus on paying it down faster and more deliberately. You’d then set repayments on this smaller portion to ensure it’s paid off within a timeframe that suits your budget.
Some borrowers even consider splitting the loan with different rate types. For example, fixing the larger portion for repayment certainty, while keeping the smaller portion variable so you can make extra repayments. Or if your lender allows extra repayments on a fixed loan, you could flip the structure.
In any case, getting advice from a mortgage broker can help you find the right setup for your goals.
How to top up your home loan and consolidate debt
Here’s a general guide of what you’ll need to do:
- Review your current home loan: Check your existing balance, interest rate and remaining loan term to understand where you stand.
- Work out the debts you want to consolidate: List the balances, interest rates and repayment amounts for each debt you plan to roll into your mortgage.
- Contact your lender or broker: Ask about a top-up refinance or explore refinancing with a different lender. Refinancing with a mortgage broker can help you compare options, calculate if you’ll be better off, and work out what you qualify for.
- Submit your application: Provide your income, expenses and asset details. The lender will also complete a property valuation to confirm the loan amount.
- Use the funds to pay out your debts: Once approved, the lender will draw down the new loan balance and clear the debts you’re consolidating.
- Adjust your repayments and pay it down faster: If possible, use any extra cash flow to make additional repayments so you clear the consolidated portion quickly and avoid paying more in interest overall.
When you add other debts to your home loan, your loan-to-value ratio (LVR) will increase. If it pushes your LVR above 80%, you may face higher interest rates or have to pay lender’s mortgage insurance (LMI), which can be expensive. Always check how the top-up will impact your LVR before proceeding.
Other ways to consolidate debt
If you’re not ready to consolidate debts into your home loan, here are some other options:
Personal loan
A personal loan for debt consolidation is a financial product offered by most lenders. This replaces various repayments with one fixed monthly payment, usually over a set term (1-7 years), which can make it easier to budget. But the average interest rate sits at 17.95% p.a. – much higher than the average home loan rate of 6.00% p.a.
Balance transfer credit card
A balance transfer credit card allows you to move existing credit card debt onto a new card with a low or 0% introductory interest rate. This can save on interest, but you’ll need to pay it off before the promotional period ends (typically within 6-24 months), or higher rates will apply.
If you’re struggling, contact your existing lenders or creditors and ask about hardship arrangements or customised payment plans. They may be willing to lower your interest, extend your term or pause payments until you’re in a better financial position. You can also contact the National Debt Helpline for free counselling and support.
Refinance guides
Options compared
Home loan types
