Debt consolidation refinancing works by increasing your home loan balance by the amount of the debts you want to pay out. You access the equity in your property - the gap between its current value and your existing loan balance - and use those funds to clear the other debts at settlement.
For example: if your home is worth $750,000, your current mortgage is $400,000 and you have $30,000 in credit card and personal loan debt, a consolidation refinance would establish a new loan of $430,000. The $30,000 is used to pay out the cards and loans at settlement, leaving you with a single home loan repayment at the home loan interest rate.
The lender assesses whether the combined loan is serviceable and whether the LVR (loan-to-value ratio) is acceptable before approving the refinance. Most lenders are comfortable consolidating up to 80% LVR without requiring Lenders Mortgage Insurance.
The immediate benefit of debt consolidation refinancing is a lower monthly repayment. Replacing 20% credit card interest with 6% home loan interest dramatically reduces the cost of carrying that debt. For a borrower with $30,000 in credit card debt at 20%, the minimum monthly payments might total $900. Rolled into a home loan, the same amount adds roughly $160 per month to repayments - a saving of $740 per month.
The risk is the term. A $30,000 credit card debt paid out today and rolled into a new 30-year mortgage may end up costing more in total interest than paying it down aggressively over three or four years - even at the higher rate. The refinance wins if the freed-up cash flow is used productively: to accelerate the mortgage, build savings or avoid accumulating the same debt again.
The best consolidation refinances come with a plan. Many clients at Lendology split the consolidated amount into a separate loan account and maintain a higher repayment on it specifically to retire the consolidated debt faster - capturing the rate benefit without extending the debt over 30 years.
Debt consolidation refinancing makes strong sense when: the interest rate differential is large (consumer debt over 15%), the debt load is causing genuine financial stress, your income and serviceability are stable, and you have a clear commitment not to re-accumulate the same debts after consolidation.
It makes less sense when: you have very little equity and would need to pay Lenders Mortgage Insurance to access the consolidation, the debts are small and could realistically be cleared in under 12 months without refinancing, or the refinancing costs (discharge fees, establishment fees, legal costs) exceed what you would save. It also requires caution if the underlying spending behaviour that created the debt has not changed - consolidation without addressing the cause is a temporary solution.
Lenders assess consolidation refinances more carefully than straightforward rate-and-term refinances. They want to understand the LVR after consolidation, your income and serviceability with the higher loan balance, and the conduct of your existing loan and debts - late payments, default history or frequent cash advances on credit cards can affect approval.
Lenders also look for evidence of genuine need and a reasonable explanation for how the debts were accumulated. A straightforward explanation (medical expenses, business downturn, separation) is generally accepted. Lenders are more cautious when debts have grown through ongoing discretionary spending without a clear change in circumstances.
Some lenders have explicit policies limiting the proportion of consumer debt that can be consolidated into a home loan. Others require statutory declarations confirming the purpose of the funds. A broker will guide you through which lenders are well suited to consolidation applications and how to present the application in the strongest possible way.
Jason and Steve are Adelaide mortgage brokers who give honest advice at no cost to you. We will run the numbers and tell you honestly whether it helps.
The information on this page is general in nature and does not constitute financial advice. Given Finance Pty Ltd (t/a Lendology) ACN 624 144 501 is authorised under LMG Broker Services Pty Ltd ACL 517192.