Should You Consolidate Debt Into Your Home Loan?
Juggling a credit card, a car loan and a personal loan on top of your mortgage can feel like a lot of repayments going out every month. Rolling those debts into your home loan is one of the most common ways people try to simplify things, and it can work well. It can also cost you more over time if it isn't set up properly.
Here's how debt consolidation into a home loan works, what it can save, where the catch is, and how to structure it so you actually come out ahead.
What does consolidating debt into your home loan mean?
It means using the equity in your home to pay out your other debts, so they become part of your home loan. Instead of several repayments at different rates, you have one loan at your home loan rate.
Most people do this by refinancing to a new lender or by asking their current lender to increase the loan. Either way, your credit cards, car loan or personal loan are paid out in full at settlement.
Why do people consolidate debt?
The main reason is the rate difference. Credit cards often sit around 20% p.a. and personal loans often sit in the low to mid teens, while home loan rates are usually much lower. Moving the debt to the lower rate can cut your monthly repayments significantly.
One repayment instead of several due dates to keep track of.
Lower monthly outgoings, which can free up cash flow straight away.
Less interest per dollar owed, because the debt is charged at your home loan rate.
How much could it save each month?
Here's an example. The numbers are illustrative only, but they're typical of what we see. Say you own a home worth $750,000 and have these debts:
Debt | Balance | Rate | Monthly repayment |
|---|---|---|---|
Home loan (25 years left) | $450,000 | 6.00% | $2,899 |
Car loan (4 years left) | $25,000 | 9.50% | $628 |
Personal loan (3 years left) | $15,000 | 13.00% | $505 |
Credit card | $12,000 | 20.99% | $360 |
Total | $502,000 | $4,393 |
Rolling everything into the home loan at 6.00% takes the total to $502,000, which is still only about 67% of the home's value. What happens next depends on how the new loan is structured.
What's the catch with debt consolidation?
A lower rate doesn't always mean less interest. Your car loan has 4 years left. If it's moved into a home loan and paid off over 25 or 30 years, you pay a lower rate for much longer, and the total interest can end up higher.
In the example above, the car loan, personal loan and credit card would cost about $14,500 in interest if paid off on their current schedules. Spread over 25 years at the home loan rate, the same $52,000 would cost about $48,500 in interest. That's more than three times as much, even at a much lower rate.
This is the part most people don't see. The monthly saving is real, but it's only half the picture.
Three ways to structure it
The same debts can be consolidated in very different ways. Here's how three common structures compare using the example above.
Structure | How it works | Monthly repayment | Monthly saving | Total interest vs now |
|---|---|---|---|---|
Current setup | Four separate debts | $4,393 | $434,300 | |
One loan, same term | $502,000 over the 25 years left on the home loan | $3,234 | $1,158 | $34,000 more |
One loan, 30 years | $502,000 reset to a new 30 year term | $3,010 | $1,383 | $147,200 more |
Split loan | $450,000 over 25 years, plus $52,000 over 5 years | $3,905 | $488 | $6,200 less |
The 30 year option frees up the most cash each month, but it's also the most expensive by a long way. The split loan saves the least each month, yet it's the only option here that reduces the total interest paid, because the consolidated debts are still cleared in 5 years.
The right choice depends on what you need. If cash flow is tight right now, a lower repayment might be the priority. If you can afford a bit more each month, a split structure usually leaves you better off long term. Our Debt Consolidation Comparison Calculator shows all three options side by side using your own numbers.
When does consolidating debt make sense?
You have enough equity. Keeping the new loan at or below 80% of your home's value usually avoids lenders mortgage insurance.
The rate gap is big. Credit cards and personal loans are the usual targets.
You'll pay it down faster. A split loan or extra repayments stop short term debt becoming 30 year debt.
You'll close the cards. Consolidation only works if the old limits don't fill back up.
When is it not a good idea?
Spending habits haven't changed. If the cards get used again, you end up with a bigger home loan and new debt on top.
The debt is nearly paid off. A car loan with 6 months left usually isn't worth refinancing.
The costs outweigh the saving. Discharge fees, application fees or break costs on a fixed rate can eat into the benefit.
It pushes you over 80% of the home's value. Lenders mortgage insurance can wipe out the saving.
What do lenders look at?
Consolidating debt is assessed like any other home loan application. Lenders will look at:
Equity: the value of your home compared with the new loan amount.
Serviceability: whether your income covers the new repayment at the lender's assessment rate, plus your living expenses.
Credit history: missed repayments or a lot of recent credit enquiries can limit your options. Here's how checking a refinance affects your credit score.
Account conduct: recent statements showing how you're managing the existing debts.
How to consolidate debt into your home loan
List every debt. Balance, rate, repayment and time left on each one.
Check your equity. Get an idea of your home's value and your current loan balance.
Compare structures, not just rates. Look at the monthly saving and the total interest for each option.
Factor in the costs. Fees to leave your current lender, set up the new loan and pay out the other debts.
Close the old accounts at settlement. This is the step that makes the saving stick.
Frequently asked questions
Does consolidating debt into a mortgage hurt your credit score? The application itself adds an enquiry to your credit file. Over time, paying out and closing credit cards and personal loans can help, because you'll have fewer open accounts and less available credit.
Can I consolidate debt into my home loan without refinancing? Sometimes. Some lenders will increase your existing loan, called a top up. Whether that's better than refinancing depends on your current rate and what other lenders offer.
How much equity do I need to consolidate debt? Most lenders will go to 80% of your home's value without lenders mortgage insurance. Some will go higher, but the extra cost needs to be weighed against the saving.
Will consolidating debt lower my repayments? In most cases, yes. Whether it also lowers the total interest you pay depends on how long the consolidated debt takes to pay off.
Can I consolidate a car loan into my mortgage? Yes. Check for early payout fees on the car loan first, and consider a split loan so the car is still paid off over a short term.
Is debt consolidation a good idea? It can be, if it lowers your costs and you have a plan to clear the debt faster than 30 years. It's a poor idea if it just makes room for more spending.
Next steps
Every situation is different, and the right structure depends on your equity, income and what you're trying to achieve. Book a free discovery call with Loan Theory and we'll work through your debts with you, compare the options across our lenders, and show you the monthly saving and the long term cost before you commit to anything.
Want to see the numbers first? Try our Debt Consolidation Comparison Calculator.
All figures in this article are illustrative examples only, using example interest rates, and aren't a quote or an offer of credit. Rates, fees and lending criteria vary between lenders and change over time. This article is general information only and doesn't take your personal circumstances into account. It isn't credit advice. Speak with a licensed broker about your situation before making a decision.
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