Refinance to Consolidate Debt: Is It Right for You?

Refinancing to consolidate debt means rolling your credit cards, car loan and personal loans into your home loan so you make one repayment, usually at a lower interest rate than your credit cards or personal loans, but you should compare the rates and fees. It can improve your monthly cashflow, but it can also cost you more in total interest if you stretch short debts over a long loan term.

For homeowners in Narre Warren North and Narre Warren South, the question is rarely whether consolidation looks tidy on paper. It is whether the numbers still work once the debts sit on a 30-year loan. This article walks through how it works, what to weigh up and when it makes sense to leave things as they are.

How Does Refinancing to Consolidate Debt Work?

When you refinance to consolidate debt, a new or existing lender increases your home loan balance and uses the extra funds to pay out your other debts. You are then left with one loan and one repayment.

The lender will usually require a property valuation to confirm how much equity you hold. Equity is the gap between what your home is worth and what you owe. Most lenders limit how much you can borrow against your property, so the available amount depends on the valuation, your existing balance and the lender's policy. You will also need to complete a full refinance application, which includes income and expense checks on your current debts.

Credit cards and personal loans often carry higher interest rates than home loans, which is why consolidation appeals. A lower rate on the same debt can reduce the monthly outgoing.

The Trade-Off: Lower Repayments Can Mean More Total Interest

Consolidating usually lowers your monthly repayment, but spreading a short-term debt over a long home loan term can increase the total interest you pay. The lower repayment is the benefit, and the longer repayment period is the cost.

A personal loan might be paid off in five years. Once it sits inside a home loan, you may be paying it off for 25 years or more unless you make extra repayments. Even at a lower rate, the longer time frame can add up. Features such as an offset account or the ability to make extra repayments can help you pay the consolidated amount down faster, though you should check what each loan offers and whether fees apply.

Consolidation Example: Working Through the Numbers

Take a homeowner in Narre Warren South with a car loan, a personal loan and two credit cards totalling $40,000. Using an illustrative rate of 6.75% p.a. for the home loan, the extra $40,000 over a 30-year term adds about $259 a month to the home loan repayment.

Suppose their existing debts currently cost them about $1,100 a month combined across the four accounts. Consolidating would drop the outgoing for those debts from about $1,100 to about $259, freeing around $840 a month. That is a real improvement in cashflow.

The catch is the term. At 6.75% p.a. over 30 years, the total repayments on that $40,000 come to roughly $93,000, because it is spread across a long period. If the homeowner instead put the $840 a month freed up back into the home loan, they would clear the consolidated amount in roughly 3.5 years (about 41 months), with total interest of about $5,000. The outcome depends on discipline. The homeowner who redirects the savings ends up better off. The one who spends them, or runs the credit cards back up, ends up with more debt than before.

These figures are illustrative only and use a 6.75% p.a. example rate. Your own result will depend on your lender, loan amount and circumstances. Use a repayment calculator to test your own numbers.

When Does Consolidating Debt Into Your Mortgage Make Sense?

Consolidation tends to make sense when your current debts carry higher rates than your home loan and you have a plan to repay the balance faster than the loan term. It makes less sense if the debts are nearly paid off or if spending habits caused the debt in the first place.

It can also make sense when your home loan is due for a review anyway. If your fixed rate period is ending, a refinance gives you the chance to compare loans and fold in other debts at the same time. Our page on fixed rate expiry explains what to look at before your rate changes.

Before you commit, ask whether you are consolidating to get on top of your finances or just to get breathing room. The first is a strategy. The second may only delay the problem.

Costs and Risks to Weigh Up Before You Refinance

The main costs of consolidating are a longer repayment period, possible fees and the risk of using your home as security for debts that were previously unsecured. If you fall behind on a home loan, your property is at risk in a way it is not with a credit card.

Check for discharge fees on your current loan, application or settlement fees on the new one, and break costs if you are leaving a fixed rate early. Some lenders offer cashback offers, but these usually come with conditions and can be outweighed by a higher ongoing rate. Compare the full cost over the time you expect to hold the loan, not just the headline rate.

You should also consider how your borrowing capacity looks afterwards. Our borrowing capacity page explains how lenders assess your income and commitments, which matters if you plan to buy again later.

Is Consolidation Different for Investors?

If the debts you are consolidating relate to an investment property, the way the loan is structured can matter for tax. Any tax treatment depends on what the borrowed funds are used for, so speak with your accountant before you make changes. Mixing personal debts and investment borrowings in one loan can make record keeping harder, and our investment loans team can talk through structuring options with you and your accountant.

Start With a Loan Review

A loan review shows whether consolidation suits you before you apply anywhere. We compare your current loan against others, look at your fees and features, and test the repayment on different terms. Our loan health check is a good starting point, and you can read more about our refinancing service as well.

If you live in Narre Warren North or Narre Warren South, we can meet locally or by phone. Call one of our team or book an appointment at a time that works for you, and we will work out whether consolidating debt is the right move for your situation.

Frequently Asked Questions