Why our clients choose a debt consolidation home loan
Among the borrowers who come to Money.com.au looking to reassess their home loan, debt consolidation is a common motivation.
In fact, our recent consumer research revealed that almost half of Australian homeowners are considering rolling their high-interest debts into their home loan
Essentially 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.
The main benefit is having 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.
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.
Client case study: Consolidated debts AND lower total repayments
Yang Qiu, Money.com.au Senior Mortgage Broker
A client came to us looking for a better solution for their mortgage and separate high-interest personal and ATO debt.
A fresh valuation of the client's property delivered a lower loan to value ratio and allowed us to secure approval for an additional $50,000 to clear the personal loan and make a big dent in the ATO balance.
We also secured the client a considerably lower interest rate, meaning their new total monthly repayment on the consolidated debt would be more than $1,000 less than the previous combined repayments on the separate loans.
This gives the client a significant chunk of spare cash to play with each month and the ability to pay down their debt faster.
Yang Qiu, Money.com.au Senior Mortgage Broker
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.
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.
Consolidation works best with a clear pay-down plan
Nick Burgess, 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."
Nick Burgess, Senior Mortgage Broker
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.
Refinance guides
Options compared
Home loan types
