Debt consolidation home loan: rolling debts into your mortgage
A debt consolidation home loan rolls credit cards, personal loans and other debts into your mortgage, either as a top-up with your current lender or by refinancing to a new one, so they are charged at a home loan rate. It costs less only if you repay the consolidated amount about as fast as you would have repaid the debts; left on a 25-year mortgage, a lower rate can cost more in total. If you have little equity or want the debt kept separate, compare debt consolidation loans instead.
- Two routes: a top-up with your current lender (often only on a variable loan) or a refinance to a new lender.
- Either way the lender revalues the property and reassesses your income, expenses and credit history.
- The rate is lower than a card or personal loan, but the debt becomes secured against your home.
- Repay the consolidated amount on the old debts’ timeline, or the longer term can cost more than you save.
- Close the cards you pay out, or the debt comes back on top of a bigger mortgage.
How a debt consolidation home loan works
- Top-up (loan increase): your current lender lends more against the same property and pays out the other debts. A fixed-rate loan often cannot be topped up without breaking the fixed rate; the home loan top-up guide sets out what they publish.
- Refinance: a new lender pays out your mortgage and your other debts in one larger loan. It suits a fixed-rate borrower who cannot top up, or anyone who can get a lower rate at the same time; the refinance home loan guide covers the costs of switching.
- Separate split or loan: some lenders put the consolidated amount in its own split with a shorter term, which makes it easier to clear on the old debts' timeline.
In each case the lender values the property, checks the new total against its loan-to-value limits (lenders mortgage insurance may apply above 80%) and reassesses whether you can afford the larger loan, with your card limits counted even if they are unused.
What it costs: $25,000 of debt, three ways
Credit cards at 20%, cleared over 5 years: about $662 a month, $14,741 in interest
Personal loan at 12% over 5 years: about $556 a month, $8,367 in interest, before fees
Home loan at 6.5%, left for 25 years: about $169 a month extra, $25,641 in interest
Home loan at 6.5%, repaid within 5 years: about $489 a month extra, $4,349 in interest
The home loan route is the cheapest only in the last row: the same discipline as the personal loan, at the lower rate. Left to run with the mortgage, it costs the most of the four. Add any valuation, discharge or switching costs before you compare.
Most failed consolidations fail the same way: the cards get cleared, the cards get refilled, and now there are two debts where there used to be one.
Andy Mc, Your Finance Guide
The risks Moneysmart flags
- Your home becomes the security: Moneysmart warns that if you cannot pay the new loan, the home you put up as security may be at risk, and says to consider all your other options first.
- A longer term can cost more: Moneysmart's own example puts $20,000 at 10% over 5 years at $25,496 in total and the same debt at 6% over 15 years at $30,379.
- New credit tempts new spending: close or reduce the cards you pay out, and do not take on new debt.
- Struggling already: if you are behind on the mortgage, ask your lender's hardship team about a hardship variation before borrowing more.
The behavioural side
The usual failure is simple: the cards are cleared into the mortgage, the cards fill up again, and the household now has a bigger home loan and the same card debt. The fix is structural rather than aspirational:
- Close the consolidated cards entirely (best option for most people)
- Reduce the credit limits on any card you keep to a small emergency amount
- Set the extra home loan repayment to match what the old debts cost each month
- Remove the cards from digital wallets so they take effort to use
- Add up what the current debts cost to clear on their own timeline, including fees
- Get the top-up or refinance cost (rate, valuation, any break or discharge cost) and a personal loan quote
- Set the consolidated amount to clear within the old debts’ timeline, not the mortgage term
- Commit to closing or freezing the consolidated credit lines
- If you are already behind on repayments, call your lender’s hardship team or the National Debt Helpline first
WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Comparison rates are calculated on a secured loan of $150,000 over 25 years for home loans and a loan of $30,000 over 5 years for car and personal loans, unless the lender states another basis. Business loans and equipment finance for a business purpose have no mandatory comparison rate.