Debt Consolidation Home Loan: When It Works and When It Costs More

A debt consolidation home loan, sometimes called a debt consolidation mortgage, rolls your credit cards, personal loans and car loan into your mortgage, using the equity in your home, so you make one repayment instead of several. It can lower what you pay each month, but it can cost more overall if those debts then take decades to repay.

Your debts become secured against your home, and that puts your home at risk. A credit card has no asset behind it. Roll it into your mortgage and, as Moneysmart warns, you could lose the home if you can’t pay off the new loan, because the lender can sell it to get its money back. Moneysmart says to consider your other options before using your home this way, and we would say the same.

We have been restructuring home loans since 2001, and the outcome usually turns on how the loan is built and what you do after settlement. The rate matters less than most people expect.

How home loan debt consolidation works

There are two ways to bring other debts inside your mortgage:

Either way the debts end up with one lender, usually on one repayment, or one per split if you use the structure below. Moneysmart’s list of debts people consolidate covers credit cards, personal loans, store cards, buy now pay later and car loans.

The room to do this comes from your equity, the difference between what the home is worth and what you owe on it.

When rolling debts into your home loan works

Moneysmart sets four tests for when consolidating may help. On a home loan, they play out like this:

If some of those aren’t true, Moneysmart says consolidating can leave you worse off.

When it costs more

The catch is the term. Moneysmart’s example takes the same $20,000 debt and refinances it to a lower rate each time, over a longer term:

These are Moneysmart’s figures, before any fees, not our pricing and not a quote. The lowest rate in that table is the most expensive loan, costing $4,883 more than the first. The example stops at 15 years. Home loans commonly run for 25 or 30, so a debt rolled in and paid at the minimum can have twice as long to collect interest.

Rolling everything in isn’t always right either, because the lowest-rate debt you have may be the loan you are already on. We had a client with an investment loan of about $660,000 who needed close to $680,000 more for a tax debt, legal costs and a renovation. One new loan for the lot meant paying the higher rate on every dollar. Leaving the existing loan alone and writing a second loan against the same property meant the higher rate applied only to the new money.

Then add the costs of getting there. Moneysmart lists application, legal and valuation fees on the new loan, plus any penalties for paying out the old debts early. Moneysmart also says to ask whether there are break costs if you repay the loan early or refinance. All of that comes off any interest you save.

The split loan that keeps the old repayment going

This is a structure we talk through with clients. Ask for the consolidated amount to sit in its own split, separate from the main loan, and keep paying what you were paying on the old debts. Many lenders on our panel can set this up. A lender may set a minimum size for each split, so check that a smaller amount qualifies.

The split keeps the debt visible instead of letting it vanish into a 30-year balance, and you can watch it fall while the main loan runs as normal.

Here’s a quick way to find your end date: divide what you owe by what you pay now each month. Say you owe $30,000 across a credit card and a car loan, and that sum comes to about 38 months. That’s a little over three years before interest, and interest will push it out somewhat. Compare that with 30 years.

Two things to check. Moneysmart says to ask whether you can make extra repayments without penalty, so settle that before you fix the rate on the split: some fixed rates limit extra repayments to a set amount each year. And nothing forces you to keep paying the higher amount, because the lender only requires the minimum on the split. An automatic transfer on payday does more than good intentions.

How much you can consolidate: equity, LVR and LMI

Two limits apply, and the tighter one decides: your equity, and whether you can afford the bigger loan.

Your loan to value ratio (LVR) is what you owe divided by what the home is worth on the lender’s valuation, and our LVR calculator will work it out. Moneysmart notes that with less than 20% equity you might have to pay lenders mortgage insurance, and that the cost can outweigh what a lower rate saves you.

On a home worth $800,000, 80% is $640,000. If you owe $500,000, that leaves $140,000 before LMI comes into it. That is room in the equity, not an approval, because the lender still tests whether your income can carry the loan.

Several lenders on our panel accept debt consolidation as a loan purpose up to 80% of the property value. Some limit how many debts you can roll in or how much unsecured debt you can include, and some won’t take tax or business debts. Above 80%, LMI can apply and each lender’s limits differ.

What lenders look at

Policy on this varies a lot from lender to lender.

That last point is why we model the full-documentation version first. A self-employed couple came to us to refinance and clear about $50,000 of maxed-out credit cards. We ran it three ways: the loan increase alone, a refinance with consolidation on full tax returns, and the same on Notices of Assessment only. The Notices-only version failed outright. Full returns worked at three lenders, with three more possible. Had we led with the quick version, we would have had to walk it back.

Tax debt is its own category. A handful of non-bank lenders on our panel will pay one out through a home loan, and some of them set the limit at around 80% to 85% of the property value. It can change the product you land on, too: rolling in an overdue tax debt moved one self-employed client from a lender’s prime tier to near prime, at a higher rate. That isn’t a reason to avoid it, but you should hear it before you decide.

Close the accounts you pay out

Skip this and you can undo the rest. An open card at zero is an easy way to end up with the bigger mortgage and fresh card debt.

It also affects what you can borrow next. A lender assesses a card’s full limit as if it’s maxed out, whatever you actually owe. We have had clients restore a big part of their loan amount by closing an unused card or dropping a high limit; one had a $37,000 limit closed before applying.

Start early on any card you don’t need. A couple we worked with each held a $25,000 limit, and when we asked for closure to be a settlement condition, the lender refused and wanted closure letters before formal approval. Card issuers can be slow with those letters.

Secured debt consolidation without the home loan

“Secured” only means you put up an asset, and it doesn’t have to be your home. A secured personal loan usually uses something like your car, and Moneysmart explains that the lender can take and sell the asset if you don’t repay. Personal loans usually run for one to seven years, so the term problem above is smaller, and your home isn’t the security.

If you would rather leave your mortgage alone, through our relationship with a firm that solely specialises in asset finance and personal loans, we can assist you with a personal loan instead. Our page on debt consolidation loans and your other options covers personal loans, balance transfers and how we can help.

If you are already struggling with repayments

Deal with that before any new loan. The National Debt Helpline says that if you are in financial hardship you usually won’t be able to get a loan to consolidate your debts.

A debt agreement is something else again. AFSA describes it as a formal option under the Bankruptcy Act that may be a suitable alternative to bankruptcy. It is not a consolidation loan or an agreement to borrow money, and it can affect your ability to get credit. We don’t offer debt agreements. The National Debt Helpline warns that some offers sold as debt consolidation are really debt agreements, often mentioning one payment and a government backed scheme.

Moneysmart also warns about companies advertising that they can clear your debt however much you owe. Before dealing with anyone, check they are licensed on ASIC’s Professional Registers.

Talk it through with a broker

We compare home loans across 52+ lenders, and as mortgage brokers we work under a Best Interests Duty. Use the form on this page or call (02) 8004 7459 and we’ll arrange a time to talk. It helps to have what you owe, the repayments and a rough idea of the home’s value on hand. We’ll go through the consolidation both ways with you, including whether leaving the home loan alone makes more sense. It’s a conversation, not an instant answer or an assessment.