Using your mortgage for debt consolidation

Rolling your other debts into your home loan is the most common form of debt consolidation for Australian homeowners. There are two routes: a top-up with your current lender, or a refinance to a new one for a larger amount. Both usually cut the monthly repayment, because a loan secured against your home is normally priced well below credit cards and unsecured personal loans, and because the debt is then spread over the years left on your mortgage. Whether it cuts what you pay in total is a different question, and the answer depends almost entirely on how quickly you pay the consolidated amount off.

Can you use a mortgage to consolidate debt?

Usually yes, if you have enough equity and the lender's assessment allows it. A top-up increases your existing home loan with your current lender and uses the extra amount to pay out the other debts. A refinance moves the whole loan to a different lender for a larger balance that covers both the existing mortgage and the debts being cleared. In either case the lender normally pays the balances directly to the credit providers at settlement rather than handing you the cash, and it will ask for recent statements for each debt so it can confirm the payout figures. Approval depends on the lender's assessment of your income, expenses, credit history and the value of your property. Lenders differ on how many debts they will absorb and what kinds, so the structure is worth checking before you commit to it. Our post on what debt consolidation means and when it helps covers the unsecured alternatives.

How much equity do you need to consolidate into a home loan?

Equity is the difference between what your property is worth and what you still owe on it. Consolidation adds to the loan, so it pushes your loan-to-value ratio up rather than down, and that ratio is what decides whether the structure works. Once the new balance passes 80% of the property's value, most lenders require lenders mortgage insurance, a one-off cost that is usually added to the loan and can outweigh the interest saved on a small consolidation. The figure that matters is the lender's valuation, not your own estimate or the price the house down the street sold for, and a valuation ordered for a refinance can come back lower than you expect. Our posts on lenders mortgage insurance and how property valuations work explain both sides of that calculation.

Does consolidating into your mortgage actually cost less?

It lowers the monthly repayment almost every time. It lowers the total cost only if you keep paying the consolidated amount down at something like its old pace. The reason is the term. A card balance and a personal loan you would have cleared in four or five years, once absorbed into a mortgage with 25 years left to run, now carries interest for those 25 years unless you do something about it. A lower rate over five times the term is not a saving. The practical fix is to treat the consolidated portion as a short loan that happens to sit inside a long one: set the repayment above the minimum, or split the loan so that portion keeps its own shorter term. Run the numbers both ways with our extra repayment calculator before you decide.

Consolidating into your mortgage changes what you pay each month. Only the repayment you set afterwards changes what you pay in total.

What do lenders look at when you ask to consolidate?

Serviceability on the new, larger loan comes first: your income and living expenses are assessed against the full balance, with a buffer applied on top of the rate. Clearing other repayments helps that assessment, because those commitments come off the list once they are paid out. Next comes conduct. Lenders read statements for the debts you want absorbed and look for missed payments, over-limit fees and cash advances, and they read your credit report for arrears, defaults and how many credit applications you have made recently. Many will also ask you to close the cards you pay out, or reduce the limits, so the balances cannot rebuild behind the new loan. Our post on how your credit score affects a home loan sets out what sits on the file and how long it stays there.

What does a consolidation refinance cost to set up?

More than most people allow for, and the costs are the reason small consolidations often are not worth doing. Expect a discharge fee on the loan you are leaving, application or settlement fees on the new one, a valuation fee in some cases, and government fees to register the new mortgage and discharge the old one. Lenders mortgage insurance applies if the new balance goes above the threshold. If any part of your current loan is fixed, breaking it early can trigger break costs, which are calculated by the lender and can be substantial. Payout figures on car and personal loans sometimes include early termination fees of their own. Add them up before comparing rates, and read the comparison rate rather than the headline: our post on how to read a comparison rate explains what it does and does not include.

When does consolidating debt into a mortgage backfire?

Three ways, mostly. The first is the swap of unsecured debt for secured debt: a credit card balance is a claim on you, while the same amount inside your mortgage is a claim on your house, and the consequence of falling behind changes accordingly. The second is rebuilding. Clearing the cards restores the limits, and if the spending that created the balances has not changed, you end up with the cards and the bigger mortgage. The third is the term trap above, which turns a short-lived debt into a 25-year one. Consolidation works as a structural fix when the debts are historical and the budget behind them is sound. Where the repayments are unmanageable now, it treats the symptom rather than the cause, and a financial counsellor is the better first call.

What if you do not have enough equity?

An unsecured personal loan over a fixed term of two to seven years is the usual alternative, and for smaller balances it often works out better even at a higher rate, because the debt is gone at the end of the term and your home is not attached to it. Some borrowers consolidate only part of the debt, or use a balance transfer to hold interest down on one card while they attack another. Others are better served by leaving the structure alone and directing everything spare at the highest-rate balance first. Which of those fits depends on your balances, your rates, your term preference and your security position, so it is worth mapping before you apply for anything. Our loan repayment calculator will show you the cost of each shape side by side.

Next step

List every debt you want to clear with its balance, rate, monthly repayment and remaining term, and put your current home loan balance and a realistic property value next to them. That one page is enough for a broker to tell you whether a top-up, a refinance or leaving the mortgage alone is the sensible structure, and roughly what each would cost to arrange. Our refinance broker page sets out how the assessment runs. Send the list through and we will work it out with you.

This information is general only and does not take your personal circumstances into account. All lending is subject to the lender's credit assessment and approval.

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