Key Takeaways
If you’re juggling multiple debts (credit cards, personal loans, car finance, buy-now-pay-later accounts), you’re not alone. The average Australian household carries over $20,000 in non-mortgage debt, often spread across several accounts with different repayment dates, minimum payments, and interest rates ranging from 8% to 22% or higher.
Debt consolidation through your home loan is one of the most effective strategies for reducing interest costs, simplifying repayments, and freeing up cash flow. By rolling high-interest debts into your mortgage at a fraction of the interest rate, you can dramatically reduce what you pay each month, and use the savings to get ahead faster.
However, debt consolidation isn’t a magic fix. Done incorrectly, it can actually cost you more over the life of the loan. This guide explains how to use debt consolidation strategically and avoid the common pitfalls.
The concept is simple: you refinance your existing home loan or access available equity to pay out your higher-interest debts. Instead of making separate payments to multiple creditors at various interest rates, you make one single mortgage repayment at a much lower rate.
There are two main approaches. If you have sufficient equity in your home, you can increase your mortgage to cover the debts being consolidated. Alternatively, if you’re already planning to refinance your home loan for a better rate, you can consolidate your debts as part of the same refinance process, often with zero additional cost.
Example savings: A family with a $15,000 credit card (21% interest), $12,000 personal loan (12% interest), and $18,000 car loan (9% interest) pays approximately $1,050/month across all three debts. Consolidating into their home loan at 6.2% reduces the combined monthly cost to approximately $290/month, saving $760/month or $9,120/year in repayments.
The primary benefit of debt consolidation is the massive reduction in interest rates. Here’s how common debt types compare to a home loan rate:
| Debt Type | Typical Interest Rate | Home Loan Rate | Potential Saving |
|---|---|---|---|
| Credit cards | 18-22% | ~6% | 12-16% |
| Personal loans | 8-15% | ~6% | 2-9% |
| Car loans | 7-12% | ~6% | 1-6% |
| Buy Now Pay Later | 0-30% (fees) | ~6% | Varies |
| Store finance | 12-25% | ~6% | 6-19% |
Here’s the critical point that many borrowers miss: while your interest rate drops dramatically, extending short-term debt over a 25-30 year mortgage term can result in paying significantly more total interest over time.
Consider a $15,000 credit card at 20% interest. If you paid it off over 3 years at $558/month, you’d pay about $5,100 in total interest. If you instead roll it into your mortgage at 6.2% over 30 years, you’d only pay $93/month, but the total interest paid would be over $18,500. That’s more than three times the interest cost despite the much lower rate.
This is why a strategic repayment plan is absolutely essential when consolidating debt. The goal isn’t simply to reduce your monthly payment. It’s to reduce your total interest cost while improving cash flow.
We recommend what we call the “debt recycle” approach to consolidation. Here’s how it works:
Step 1: Consolidate all high-interest debts into your home loan. Your monthly repayments will drop significantly.
Step 2: Calculate the difference between your old combined payments and your new single payment. In our earlier example, this was $760/month.
Step 3: Direct the savings as additional repayments on your home loan, or into an offset account linked to your mortgage. This accelerates your loan payoff without changing your monthly budget.
Step 4: Close all credit card accounts and cancel store finance facilities. Remove the temptation to re-accumulate debt. Keep one low-limit credit card for emergencies if needed, but pay the balance in full each month.
Using this approach, the $45,000 in consolidated debt from our example would be paid off in approximately 5 years rather than 30, and the total interest paid would be just $8,400, far less than the $5,100 + $4,800 + $7,200 = $17,100 you’d have paid keeping the debts separate.
Real Client Example
A couple from Belmont had accumulated $52,000 in debts across two credit cards ($18,000 and $12,000 at 20% and 19.5%), a personal loan ($14,000 at 11.5%), and a car loan ($8,000 at 9.9%). They were paying over $1,400/month across these debts and barely keeping up. We refinanced their home loan and consolidated all debts, reducing their monthly commitment by $850. They committed to putting $600 of that saving as extra home loan repayments. Within four years, the consolidated debt was fully absorbed, and they were $35,000 ahead on their mortgage. More importantly, they closed all credit cards and haven’t taken on new unsecured debt since.
Debt consolidation through your home loan is most beneficial when you have sufficient equity in your property (generally at least 20% after consolidation to avoid LMI), when the combined interest rate of your current debts significantly exceeds your mortgage rate, when you’re disciplined enough to avoid accumulating new debt after consolidation, and when you commit to a strategy of making extra repayments to clear the consolidated amount within 3-7 years rather than 30.
It may not be suitable if you have limited equity, if your debts are small (under $5,000 total), if the consolidation would push your LVR above 80% and trigger LMI costs, or if there’s a pattern of repeatedly accumulating debt that suggests a budgeting issue rather than a structural problem.
Pro Tip: Some lenders offer a “split loan” facility where you can create a separate loan split for the consolidated debt with a shorter term (5-7 years). This keeps the consolidated debt separate from your main mortgage and ensures it’s paid off quickly. Ask your broker about this option.
Many people don’t realise how dramatically existing debts reduce their borrowing capacity. Lenders assess your ability to service a new loan by looking at your existing commitments, and the impact of revolving credit (like credit cards) is particularly significant.
For credit cards, lenders assess the full credit limit, not just the outstanding balance. A $10,000 credit card with a zero balance is still assessed as if you owe $10,000, because you could draw on it at any time. At a typical assessment rate, this single credit card could reduce your borrowing capacity by $30,000-$50,000.
Buy Now Pay Later accounts are also assessed by most lenders. Even small BNPL limits can reduce your capacity. If you’re applying for a home loan or looking to access equity, closing unused credit cards and BNPL accounts before your application can significantly improve your borrowing power.
If debt consolidation through your home loan isn’t suitable, there are other options worth considering:
Balance transfer credit cards: Many cards offer 0% interest on balance transfers for 12-24 months. If you can pay off the debt within the promotional period, this can be cheaper than consolidating into your mortgage. However, the standard revert rate (typically 20%+) makes this risky if you don’t clear the balance in time.
Personal debt consolidation loans: Some lenders offer unsecured personal loans specifically for debt consolidation at rates of 7-12%. These have shorter terms (3-7 years) which ensures the debt is cleared faster, though monthly repayments will be higher than mortgage consolidation.
The avalanche method: If you prefer not to touch your mortgage, focus all extra payments on the highest-interest debt first while making minimum payments on everything else. Once the first debt is cleared, roll that payment onto the next highest-interest debt. This mathematical approach minimises total interest paid.
The snowball method: Similar to the avalanche method, but you focus on the smallest balance first regardless of interest rate. The psychological wins from clearing individual debts quickly can help maintain motivation, even though it’s not mathematically optimal.
If you’re considering consolidating your debts through a refinance, here’s what the process looks like from start to finish:
Initial consultation (Day 1): We review your current home loan, outstanding debts, income, and property value to determine whether consolidation is the right strategy. We’ll model the numbers so you can see the real savings and compare options.
Lender comparison (Days 2-3): We compare options across 60+ lenders, looking at interest rates, fees, cashback offers, loan features, and consolidation policies. Some lenders have specific requirements around debt consolidation. For example, some will pay out debts directly rather than releasing funds to you.
Application and documentation (Days 3-7): We submit your application with all supporting documents including payslips, bank statements, tax returns (if self-employed), and statements for all debts being consolidated. We handle the entire paperwork process and liaise with the lender on your behalf.
Valuation and approval (Days 7-21): The lender orders a property valuation and assesses your application. Turnaround times vary between lenders, from 3 days with some digital lenders to 3 weeks with major banks during busy periods. We keep you updated throughout.
Settlement (Days 21-45): Once approved, your new lender pays out your old home loan and all debts being consolidated. Your credit cards and personal loans are closed, and you’re left with one single repayment at a much lower rate. The entire process typically takes 3-6 weeks from application to settlement.
Consolidation addresses the symptom, but changing spending habits addresses the cause. Here are practical strategies to avoid falling back into debt after consolidation:
Create a realistic budget. Track every dollar for at least one month to understand where your money actually goes. Many people are shocked to discover how much they spend on subscriptions, dining out, and impulse purchases. Tools like free budgeting apps or even a simple spreadsheet can provide clarity.
Build an emergency fund. One of the main reasons people turn to credit cards is unexpected expenses: car repairs, medical bills, appliance replacements. Having $3,000-$5,000 in a high-interest savings account provides a buffer that prevents you from reaching for credit when surprises arise.
Use the “24-hour rule” for non-essential purchases. Before making any purchase over $100 that isn’t a real necessity, wait 24 hours. This simple habit eliminates most impulse spending and ensures purchases are deliberate rather than emotional.
Automate your finances. Set up automatic transfers on payday: mortgage repayment first, then savings, then bills, then discretionary spending. When saving and debt repayment happen automatically, you’re less likely to spend the money elsewhere.
Real Client Example
A single mum from Geelong West was paying minimum repayments on three credit cards totalling $28,000. With interest charges exceeding $400 per month, her balances were barely moving despite paying $650/month combined. We consolidated the debt into her home loan, reducing her monthly payment to $170. She committed to paying $500/month (still less than the old $650), closed all three cards, and will have the consolidated debt cleared in under 5 years. She now saves $150/month into an emergency fund, something she could never do before with all the minimum payments consuming her cash flow.
Will debt consolidation affect my credit score?
Initially, the refinance application will create a credit enquiry on your file. However, once your debts are consolidated and the accounts closed, your credit utilisation ratio improves, which typically benefits your credit score over time. Making consistent mortgage repayments further strengthens your credit profile.
Can I consolidate debt if I have bad credit?
It depends on the severity of the credit issues. Minor defaults or late payments may still allow consolidation through certain lenders, though rates may be higher. If you have serious credit impairments (bankruptcy, Part IX agreements, or significant defaults), you may need to work with a specialist lender. A broker experienced in non-conforming lending can advise on your options.
How much equity do I need to consolidate debt?
Most lenders require your loan-to-value ratio to remain at or below 80% after consolidation. For example, if your property is worth $700,000 and you currently owe $450,000, you have $110,000 in usable equity (80% of $700,000 = $560,000, minus $450,000 = $110,000). Some lenders will go to 90% LVR with LMI, which would give you more usable equity but adds the cost of LMI.
Should I close my credit cards after consolidation?
We strongly recommend closing most or all credit card accounts after consolidation. The most common reason debt consolidation fails is that borrowers keep their cards open and gradually accumulate new balances. If you want to keep one card for convenience, reduce the limit to $2,000-$3,000 and commit to paying the full balance monthly.
Can I consolidate debt when refinancing my home loan?
Yes, this is one of the most cost-effective times to consolidate. Since you’re already refinancing, the additional cost of consolidating debts is minimal, often just the valuation fee and some additional paperwork. Many borrowers save significantly on their home loan rate AND eliminate high-interest debts in a single transaction.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
