Three in four Australian households are juggling more than one debt, often a mortgage alongside personal debts like a credit card or car loan. Keeping track of multiple repayments, due dates and interest rates can quickly become overwhelming, especially as higher interest rates put extra pressure on household budgets. It’s no surprise more borrowers are turning to debt consolidation to combine their debts into a single loan.
What is debt consolidation?
Debt consolidation involves combining multiple debts — like credit cards, personal loans and car finance — into a single loan, ideally with a lower interest rate than you’re currently paying across those debts.
If you own your home, the most common way to consolidate debt is by refinancing your mortgage and rolling your other debts into it. While your mortgage balance and repayments may increase, your total monthly repayments will be lower if your new home loan has a lower interest rate than the combined rates you’re paying across your existing debts.
If refinancing isn’t an option, your broker may recommend a debt consolidation personal loan instead. You use the loan to pay off your existing debts, and that leaves you with a single monthly repayment rather than juggling multiple loans, due dates and interest rates.
What types of debt can you consolidate?
Depending on your lender and circumstances, you may be able to consolidate debts like:
Credit cards
Car loans
Personal loans
Buy Now, Pay Later balances
Store cards
But remember, lenders vary quite a bit on exactly what they’ll include, so it’s worth checking with whoever you’re consolidating through.
How to consolidate debt: 2 types of debt consolidation loans
There are two main ways to consolidate debt, and the right option depends on whether you own a home and have enough equity to borrow against.
- Home equity loan for debt consolidation
For homeowners, the most common option is to refinance your mortgage and borrow against the equity you’ve built up. The additional funds are then used to pay off your existing debts.
Because the loan is secured against your home, it typically comes with a much lower interest rate than other forms of borrowing. However, your home is used as security, so falling behind on repayments could put your property at risk.
- Personal loan for debt consolidation
This one works for anyone, whether you’re a homeowner or not. You take out an unsecured personal loan sized to cover your existing debts, pay them off in one go, and repay the new loan over a fixed term – it’s usually somewhere between one and seven years.
Yes, the rate will end up sitting above what you’d get through a mortgage, but it’s typically well below those credit card rates. And because the loan term is shorter, you’re not stretching the debt out for decades, so it’s still a major plus.
Pros & cons of debt consolidation
Pros | Cons |
Consolidating debt into your mortgage provided a lower interest rate than credit cards and other unsecured debts | You could pay more interest overall if you extend your debt over a longer loan term, like a 25- or 30-year mortgage |
One repayment instead of several, making your finances easier to manage | Secured options put your home or other assets at risk if you can’t keep up repayments |
Can free up cash flow by reducing your monthly repayments | A debt consolidation personal loan will have a higher interest rate than a home loan |
A fixed-term personal loan provides a clear path to becoming debt-free | Doesn’t fix the spending habits that built up the debt in the first place |
Austin Rulfs
Financial Services Expert
“Debt consolidation shouldn’t be viewed simply as a way to reduce monthly repayments. The real objective is improving your overall financial position. For some borrowers that means lowering interest costs, while for others it means creating enough breathing room to rebuild savings, reduce financial stress and get back on track with a structured repayment plan.”
— Austin Rulfs, Director, Zanda Wealth
Debt consolidation risks
It’s important to know that rolling debts together isn’t completely risk-free, and a few of those risks are really worth considering upfront before you sign or otherwise commit to anything:
More interest paid over time: Lower monthly repayments can be appealing, but they don’t always mean you’ll pay less overall. While a home loan may have a lower interest rate, extending short-term debts over a 25- or 30-year mortgage will increase the total interest you pay unless you repay the loan ahead of schedule.
Negative equity: Rolling other debts into your mortgage increases your home loan balance, and reduces the equity you’ve built up. If property values fall significantly, or you need to sell sooner than expected, you could end up with less equity than anticipated or, in some cases, owing more than your home is worth (negative equity).
Secured vs unsecured debt: Debt consolidation through a mortgage or other secured loan typically offers a lower interest rate, but your home or another asset is used as security. If you can’t keep up with repayments, you risk losing that asset. Opting for an unsecured debt consolidation loan gets rid of that particular risk, but the trade-off there is that they generally come with a higher interest rate to compensate.
Fees and charges: Debt consolidation isn’t free. Refinancing or taking out a new loan comes with application fees, discharge fees, valuation costs, settlement fees and occasionally early repayment charges on the loans you’re closing out. So before committing, check that what you’ll save in interest actually outweighs these costs – because the math doesn’t always turn out the way you might expect.
Debt consolidation: How it works in practice
Here’s how debt consolidation can work in practice. Let’s say you have a $20,000 car loan with five years remaining at 9% p.a. interest. You roll it into your existing $600,000 home loan, which has 25 years remaining at 6% p.a. Adding the debt to your mortgage increases your monthly repayment by around $129, but saves you roughly $286 a month compared to repaying the car loan separately.
The catch is that lower monthly repayments don’t necessarily mean you’ll pay less overall. By stretching a five-year car loan over a 25-year mortgage, the total interest on that $20,000 could increase to around $38,680 — roughly $13,748 more than if you’d left the car loan untouched.
You can reduce much of that extra interest by making additional repayments on your mortgage. Using some or all of the monthly savings to pay down your home loan sooner can help offset the higher long-term interest cost.
Emmanuel Guignard
Financial Services Expert
“Every lender assesses debt consolidation differently. Some are more comfortable consolidating credit cards, personal loans or tax debts than others, and the supporting documents they require can vary significantly. Choosing a lender whose policy matches your circumstances is often just as important as securing a competitive interest rate.”
— Emmanuel Guignard, Director & Principal, Loanscope
Note: Example assumes the mortgage interest rate remains unchanged for the life of the loan, no further refinancing occurs, and only minimum repayments are made.
Looking for a debt consolidation broker?
Is debt consolidation the same as refinancing?
Not quite, although the two are closely linked.
Refinancing means replacing your existing home loan with a new one, either with your current lender or a different lender. Debt consolidation is one reason people refinance, but it’s far from the only one.
Homeowners also refinance to access a lower interest rate, renovate their home, release equity or access cash for other purposes. In other words, refinancing is the process, while debt consolidation is one possible outcome.
FAQs about debt consolidation
Does debt consolidation hurt your credit score?
Applying for a new loan or refinancing your mortgage usually involves a credit check, so your credit score may take a small, temporary hit. However, the impact is generally short-lived. Over time, consolidating your debts could have a positive effect if it makes your repayments easier to manage and you consistently pay them on time.
Can you consolidate debt with bad credit?
Yes, it’s possible, but your options may be more limited. Lenders assess factors like credit history, income and existing debts when deciding whether to approve a debt consolidation loan. A poor credit score could mean paying a higher interest rate, meeting stricter lending criteria or having your application declined. A mortgage broker can help you understand which lenders and loan options may be available based on your circumstances.
How much equity do you need to consolidate debt into your mortgage?
This varies by lender, but many will want you to retain at least 20% equity in your home after the new debt is added to avoid paying lenders mortgage insurance (LMI). If you have less equity than that, your refinancing options may be more limited, and a personal loan or other debt consolidation option could be more suitable.
Can you consolidate debt without owning a home?
Yes. If you don’t own a home or don’t have enough equity to refinance, you may still be able to consolidate your debts using a personal loan. For people consolidating credit card debt only, a balance transfer credit card may also be an option.
Is debt consolidation worth it?
Debt consolidation can simplify your finances and reduce your monthly repayments, but it’s important to look beyond the monthly savings. The key question is whether you’ll pay less overall once interest, fees and the loan term are taken into account.
Before consolidating your debts, compare your options carefully. Use Ourtop10’s repayment calculator to estimate your loan costs, while a mortgage broker or financial adviser can help you determine which option is likely to leave you better off based on your circumstances.
Mansour Soltani
Financial Services Expert
With over two decades of experience in Australia’s real estate sector, Mansour has built a career specialising in the acquisition and sale of investment and commercial properties, spanning major metropolitan hubs and regional areas. As the founder and owner of a finance brokerage firm, he manages a loan portfolio exceeding $250 million while serving a broad range of clients nationwide.
A frequent contributor to money.com.au, Mansour has developed a deep understanding of diverse investment strategies, enabling him to provide valuable, well-informed perspectives on market trends and opportunities.