Everything You Need to Know About Debt Consolidation

Consolidating Debt Through Refinancing Can Save You Hundreds Each Month

Refinancing your home loan to consolidate debt means rolling your personal loans, car loans, and credit card balances into your mortgage. This typically reduces your total monthly repayments because home loans carry lower interest rates than most other forms of credit. Instead of juggling multiple repayments across different accounts, you make one repayment at a lower overall rate.

Consider someone with a $400,000 mortgage, a $25,000 car loan, and $15,000 spread across two credit cards. Their car loan might sit at 8% and their credit cards at 18% to 22%. That's around $1,200 in monthly repayments just for the car and cards, on top of their mortgage. By refinancing to consolidate those debts into their home loan at a variable interest rate closer to 6%, the combined repayment drops significantly, often by $300 to $500 per month depending on the loan term.

The decision to consolidate makes sense when your current debts are costing more in interest and stress than the small increase to your mortgage balance. It doesn't suit everyone, particularly if you're already struggling to meet your mortgage repayments or if you lack the discipline to avoid running up new debt once the cards are cleared.

Why Interest Rates Make Consolidation Worth Considering

Home loans carry lower interest rates than almost any other consumer credit product. A personal loan might charge 10% to 14%, a car loan 7% to 12%, and credit cards often sit above 18%. Your home loan typically sits well below all of these, which is why consolidating makes financial sense for many households.

When you refinance to consolidate debt, you're replacing high-cost debt with a lower-cost option. The trade-off is that you're securing previously unsecured debt against your property, which means your home becomes the security for what was once just a credit card balance. That's a risk worth understanding before you proceed.

Lenders assess your application based on your current borrowing capacity, the equity you hold in your property, and your ability to service the new loan amount. If your property has increased in value since you bought it, you may have enough equity to absorb the additional debt without needing to provide extra cash or a guarantor.

How Much Equity Do You Need to Consolidate Debt?

You need enough equity in your property to cover the consolidated debt while keeping your loan-to-value ratio (LVR) at a level the lender will accept. Most lenders allow you to borrow up to 80% of your property's value without paying lenders mortgage insurance, though some will go higher with insurance added to the loan.

If your property is worth $600,000 and your current mortgage sits at $400,000, you have $200,000 in equity. At 80% LVR, you could borrow up to $480,000, which gives you $80,000 in accessible equity before hitting that threshold. That's more than enough to absorb a car loan and some credit card debt without additional costs.

Equity alone doesn't guarantee approval. Lenders also review your income, expenses, and credit history to confirm you can service the larger loan amount. If your debts have pushed your credit score down or your living costs have increased, you may need to address those issues before refinancing. A loan health check can help identify any obstacles before you apply.

The Refinance Process for Debt Consolidation

The refinance process starts with understanding what debts you want to consolidate and confirming you have enough equity to support the new loan amount. You'll need to gather statements for all the debts you're consolidating, along with your current mortgage details and recent payslips.

Once you submit a refinance application, the lender will arrange a property valuation to confirm your home's current value. This valuation determines how much equity you hold and whether the lender can approve the loan amount you're requesting. The lender will also verify your income and assess your expenses, including the debts you're consolidating.

Approval times vary, but most applications take two to four weeks from submission to settlement. Once approved, the lender pays out your existing mortgage and transfers the funds to clear your consolidated debts. You're left with one loan and one repayment, typically at a lower combined rate than what you were paying before.

Will Consolidating Debt Cost You More in the Long Run?

Consolidating debt into your mortgage reduces your monthly repayments but may increase the total interest you pay over time if you extend the repayment term. A car loan might have three years remaining, but when you roll it into a 30-year mortgage, you're paying interest on that debt for decades unless you make extra repayments.

In a scenario where someone consolidates $40,000 in short-term debt into their mortgage and makes only the minimum repayment, they'll pay more interest over the life of the loan than if they'd kept the debts separate and paid them off within their original terms. The monthly saving is real, but the long-term cost is higher unless you actively pay down the additional debt.

You can avoid this by making extra repayments or using an offset account to reduce the interest charged on your loan amount. Most variable home loans allow unlimited extra repayments without penalty, and many include offset or redraw features that let you access those funds if needed. This gives you the flexibility to reduce your loan costs while keeping a buffer for emergencies.

What Happens to Your Credit Cards After Consolidation?

Once your lender clears your credit card balances as part of the refinance, those accounts remain open unless you close them. Leaving them open can tempt you to build up new debt, which defeats the purpose of consolidating in the first place. Most brokers recommend closing the accounts or at least reducing the credit limits to prevent this.

Lenders often require you to close high-limit cards before approving the refinance application, particularly if your borrowing capacity is tight. A $20,000 credit card limit counts as a potential liability even if the balance is zero, because the lender assumes you could draw on it at any time. Closing or reducing limits improves your application and reduces the temptation to accumulate new debt.

If you keep one card open for everyday spending, choose a low-limit account and commit to paying it off in full each month. This maintains a small line of credit for convenience without creating the same risk as multiple high-limit accounts.

Fixed or Variable After Refinancing to Consolidate Debt?

Choosing between a fixed interest rate and a variable interest rate after refinancing depends on your priorities. A variable rate gives you flexibility to make extra repayments and access features like offset accounts and redraw, which are useful if you want to pay down the consolidated debt quickly. A fixed rate locks in your repayment amount for a set period, which helps with budgeting but usually comes with restrictions on extra repayments and fewer features.

If your main goal is to stabilise your cash flow and avoid repayment increases, fixing part or all of your loan might suit you. If you want the ability to throw extra money at the loan when you can, a variable rate or a split loan gives you more control. Many households choose a split, fixing a portion for certainty and leaving the rest variable for flexibility.

If your fixed rate period is ending on your current loan, refinancing to consolidate debt at the same time lets you review your rate and features in one process rather than dealing with them separately.

When Consolidating Debt Doesn't Make Sense

Consolidating debt into your mortgage isn't the right move if you're already struggling to meet your current home loan repayments or if the underlying spending habits that created the debt haven't changed. Rolling debt into your mortgage without addressing the behaviour that caused it often leads to new debt within a year or two, leaving you in a worse position than when you started.

It also doesn't make sense if you're planning to sell your property in the near future. Refinancing involves application fees, valuation costs, and sometimes discharge fees on your current loan. If you're selling within 12 months, those costs may outweigh the savings from consolidation.

If your equity is limited or your property value has dropped, you may not have enough buffer to consolidate debt without exceeding 80% LVR and triggering lenders mortgage insurance. In that case, you might be paying more in upfront costs than you save in monthly repayments, particularly if the debts are small or nearly paid off.

How Savvy Home Loans Approaches Debt Consolidation

We regularly work with clients who want to consolidate debt as part of a broader strategy to improve cash flow and reduce financial pressure. The conversation usually starts with understanding what debts are causing the most strain, whether consolidating them makes financial sense, and what the long-term impact looks like if you proceed.

We review your current mortgage, the equity in your property, and your capacity to service a larger loan amount. If refinancing to consolidate debt will genuinely reduce your repayments and improve your position, we'll structure the application to give you the outcome you need. If it's going to cost you more in the long run or if there's a different approach that suits you, we'll tell you that too.

Call one of our team or book an appointment at a time that works for you. We'll walk through your debts, your equity, and the refinance process so you know exactly what consolidation looks like for your situation.

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