Nearly half of Australian adults who have debt - around 5 million people - struggled to meet their repayments in the 12 months to April 2024, according to ASIC research.

If you're in over your head and your repayments are only pulling you down further, debt consolidation could be a solution worth considering. Here's how it works.

What is debt consolidation?

Debt consolidation means to roll multiple debts into one facility. Typically, this facility has a lower interest rate than the original loans, reducing the number of repayments the borrower needs to manage.

Consolidating debt can help ease the financial and mental burden of repaying multiple consumer debts, such as credit card debt, personal loans, and buy now, pay later (BNPL) debts.

Most people who consolidate debt do so into a new or existing personal loan or home loan, as these tend to offer lower rates and fewer fees than credit cards and BNPL providers. This article will focus on the ins and outs of consolidating debt into a home loan.

When consolidating debt, a person will typically take out a new loan and use that borrowed money to pay off all their other debts. They will then simply meet the repayments on the new loan in order to repay all their borrowings.

Is consolidating debt into a home loan a good idea?

If you have a home loan, it might be worth considering consolidating your existing consumer debts into your mortgage by refinancing in order to access home equity as cash, then using that cash to pay off your other debts. However, depending on your personal circumstances, your spending habits, and your level of debt, consolidating debt into a home loan can be incredibly risky.

After all, your home loan is likely tied to your house, and if you default on your home loan repayments you might lose the roof over your head.

Before making this decision, it's important to understand both the benefits and the risks.

Benefits of consolidating credit card or consumer debt into a home loan

The main advantage of consolidating debt into a home loan is access to a lower interest rate and a longer loan term, both of which can significantly reduce a person's monthly repayments.

For example, in July 2024, the average variable rate for a new home loan was around 6.3% p.a., while many lenders were charging some personal loan and credit card customers interest at a rate of 20% p.a. or more.

Here's how those rates would change the monthly repayments and total interest for someone with $50,000 in debt over a five-year term:

Interest Rate (p.a.)

Monthly Repayments

Total Interest Over Five Years

20%

$1,325

$29,482

6.3%

$974

$8,418

On top of that, personal loans usually have a maximum loan term of seven years, while home loans can stretch out to 30 years. Spreading your repayments over a longer period can leave you with smaller regular payments, which could be a relief if you're struggling to keep up with your debts. But keep in mind, a longer loan term could leave you paying more interest overall (we'll talk about that in a bit).

Also, consolidating all your debts into a single home loan can make life simpler. Instead of managing multiple repayments, you'll only need to focus on one - whether that's a weekly, fortnightly, or monthly repayment.

Drawbacks of consolidating credit card or consumer debt into a home loan

While consolidating your debt into a home loan can have its benefits, there are many potential downsides to think about before making the move.

1. You might end up paying more in interest over time

Even though home loans usually have lower interest rates, spreading your repayments over a longer period - say 20 or 30 years instead of five or seven years - means you'll end up paying more in interest overall.

For example, here's how it would look to repay a $50,000 debt over five years vs. 20 years at the same interest rate of 6.3%:

Loan term

Monthly repayments

Total interest paid

5 years

$974

$8,418

20 years

$366

$38,061

As you can see, while extending the loan term can lower monthly repayments, it often results in significantly higher overall interest costs in the long run. Of course, if a shorter loan term would make it hard to meet your repayments, paying more in interest is likely a better alternative than risking default.

Additionally, if you can afford to make extra repayments on your home loan, you could offset this impact over time.

2. Your home is on the line

When you consolidate unsecured debts (like credit cards or personal loans) into your mortgage, those debts become secured against your home. This means that if you can't keep up with your mortgage repayments, your lender could repossess your property to recover its losses.

It's a serious risk, especially if your income is unstable or you're prone to accumulating more debt.

3. It can take longer to pay off your home

By consolidating debt into your home loan, you're increasing the amount owed on your property. This can extend the time it takes to fully pay off your mortgage, delaying pushing back any goals of being mortgage-free.

4. You could be tempted to rack up more debt

While consolidating may lower your monthly payments, it can also make it tempting to use credit again. This can create a cycle of accumulating more debt on top of your mortgage, potentially putting you in a worse financial situation long-term.

If your debt is linked to an addiction, it's important to seek help for both the addiction and financial issues before consolidating. Free resources like the National Alcohol and Other Drug Hotline (1800 250 015), the National Gambling Helpline (1800 858 858), and the National Debt Helpline (1800 007 007) are available to provide support.

9 signs debt consolidation into your home loan could be right for you

If you've gotten this far and still feel that consolidating your debt into your mortgage is the right move for you, here are nine signs you might be ready to do so.

Importantly, this is not financial advice and you're advised to seek the help of an independent financial advisor if you're considering consolidating your debt.

1. You're struggling to manage multiple high-interest debts

If you have several debts, such as credit cards or personal loans, rolling them into your mortgage can simplify your payments by consolidating everything into one lower-interest loan.

2. You're committed to not adding more debt

Consolidating consumer debt into your mortgage comes with risks, and it's important to avoid taking on new debt afterward. Otherwise, you could end up in an even worse financial position, with both a larger mortgage and additional debts to manage.

3. Your mortgage interest rate is lower than your other debts

Mortgage interest rates tend to be lower than those of credit cards or personal loans. By consolidating, you could lower the overall interest rate you're paying on a day-to-day basis. However, keep in mind that you might end up paying more interest in total due to the longer lifespan of a home loan.

4. You have enough equity in your home

To consolidate other debts into your mortgage, you'll need to have built up enough home equity that you can access the necessary funds.

5. You want to lower your monthly payments

Consolidating debts into a mortgage typically extends the repayment term of the loan, which could reduce your monthly repayments and help to free up cash flow.

6. You understand you might pay more interest overall

The interest rate on a home loan is typically lower than that on other forms of debt. However, since home loans generally have longer loan terms than personal loans and the likes, a person consolidating consumer debt into a mortgage might end up paying more interest over time than they otherwise would have.

7. You're paying high fees on multiple debts

If you're juggling multiple debts, you might be facing regular fees and penalties from each. Consolidating these debts into a single facility can help reduce the number of fees you're paying.

8. Your credit score allows you to refinance your mortgage

Your credit score will likely need to be high enough that you're eligible to refinance your home loan, thereby allowing you to access the equity needed to consolidate into your mortgage.

See also: How to improve your credit score

9. You're planning to stay in your home long-term

Debt consolidation into a mortgage works best if you're planning to own your current home for the foreseeable future, as selling shortly after refinancing could mean you don't recoup the cost of doing so.

Image by Pawan Kawan on Unsplash

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