Debt consolidation: when rolling debts into your home loan helps, and when it costs more

Debt consolidation means rolling several debts into one new loan, so you make one regular repayment to one lender. For homeowners, that often means refinancing and adding credit cards, personal loans or a car loan to the mortgage.

Done well, it can take real pressure off the household budget. Done poorly, it can turn a five-year debt into a thirty-year one. Here's how to tell the difference.

Why consolidating can help

Home loans are secured by your property, so they often carry a lower interest rate than credit cards and unsecured personal loans. Moving those debts into your home loan may lower the rate you pay on them and reduce your total monthly repayments.

It can also make life simpler. One repayment is easier to track than four, and you're less likely to miss a due date. For shift workers juggling rosters and pay cycles, that alone can be worth something.

Why it can cost more

Moneysmart puts it plainly: a longer loan term will reduce your weekly repayments but could increase the total cost. A car loan you'd have paid off in four years, once added to a 30-year home loan, could still be costing you interest decades later.

Illustrative example: say you have $20,000 of credit card and personal loan debt you're on track to clear in five years. Roll that $20,000 into a home loan with 25 years to run and make only the minimum repayments, and you'll be paying interest on it for about 20 years longer. Even at a lower rate, the total interest can end up higher.

There are other costs and risks too:

• Fees. Refinancing can involve application, legal, valuation and discharge fees. Some lenders charge these. If you're on a fixed rate, breaking it early can mean a break cost.
• Your home is on the line. Moneysmart warns that when you turn unsecured debt into secured debt, your home may be at risk if you can't repay the new loan.
• Lenders mortgage insurance. If adding the debts takes your loan above 80% of your home's value, some lenders may charge LMI, which adds to the cost.
• The debts come back. If the credit cards stay open, it's easy to run them up again. Then you have the bigger home loan and the cards.

When consolidation tends to help

Consolidation is more likely to work in your favour when:

• You close or reduce the old cards and loans, and don't take on new debt. Moneysmart lists this as a key condition.
• You keep paying the consolidated amount off over roughly the same timeframe as the original debts.
• You have enough equity that the extra borrowing doesn't push you into LMI.
• The fees to refinance are small compared with what you save.
• Your income is stable enough to keep up repayments if your roster or overtime changes.

One practical approach is to put the consolidated debts into a separate loan split, then set the repayments on that split to clear it within a set time. Many lenders allow loan splits. You keep the lower rate and you can see that balance going down.

When it tends to cost more

• You make only the minimum home loan repayment and let the old debts stretch out over the full term.
• The cards stay open and get used again.
• Refinancing costs, break costs or LMI wipe out the saving.
• The underlying problem is spending, and consolidation simply makes room for more.

If you're already struggling

If you're behind on repayments, consolidation may not be the answer, and a lender may not be able to help in any case. Contact your lenders early and ask about hardship options. The National Debt Helpline offers free financial counselling on 1800 007 007, Monday to Friday, 9.30am to 4.30pm.

Be wary of companies promising to get you out of debt no matter how much you owe. Moneysmart warns that this may be unrealistic. Avoid anyone who's unlicensed, asks you to sign blank documents or rushes you. You can check a licence on ASIC's Professional Registers Search.

How we approach it

Before recommending consolidation, we'll look at what you owe, your equity, your income pattern and the full cost of refinancing. Then we'll compare the total cost of consolidating against keeping things as they are. If it doesn't stack up, we'll tell you. You can read more on our refinance page. If you're on roster income, our mining and FIFO home loans page explains how lenders may look at overtime and allowances.

Talk it through

If you'd like a straight answer on whether consolidating would save you money, call or text us on 0458 773 002 or book a free assessment at our contact page. For most home loans there's no broker fee; any fee is disclosed upfront in our Credit Guide.

Common questions

Sources

• Moneysmart: Debt consolidation and refinancing
• National Debt Helpline

This guide is general information only and doesn't take into account your objectives, financial situation or needs. Talk to us about your circumstances before acting on it. Related: Refinancing.