Using a home loan to consolidate debt

Putting credit-card or personal-loan debt into a home loan may reduce the interest rate, however it also places that debt against the home and can extend the repayment period substantially. The decision needs to account for both changes.

Why the repayment can look much lower

Home-loan rates are often lower than unsecured consumer-credit rates, and mortgages run for long periods. Both factors can reduce the regular repayment on the consolidated amount. A lower repayment alone does not show the total cost.

If the debt is added to the mortgage, calculate a separate repayment that clears the consolidated amount over the period you genuinely intend. Otherwise a balance that could have ended in four years may remain inside the mortgage for much longer.

Valuation, legal, settlement, discharge and application costs may apply. If fees are added to the mortgage, include the interest charged on them. Compare the complete cost with an unsecured consolidation loan as well as the current debts.

Understand the security change

Credit-card and many personal-loan balances are unsecured. Once added to home lending, the home supports the debt. If the new loan cannot be repaid, the lender may ultimately take action against the secured property after following the required process.

If you are already struggling with mortgage repayments, speak to the lender’s hardship team before increasing the home loan. A free financial counsellor can also help compare options without selling a new credit product.

If unsecured debts are added to a mortgage, ask for a separate split and a repayment period chosen for that amount. Otherwise a card balance can remain inside the home loan for much of the mortgage term.

Before moving consumer debt onto your home, calculate the repayment and total cost over the period in which you intend to clear it. You can also install WeMoney, connect your accounts and use the app to see the debts beside your household expenses. Review your personalised savings opportunities before relying on a smaller mortgage repayment to make the option work.

A worked term example

Adding $20,000 to a home loan at 6.5% costs about $391 a month over 5 years and roughly $3,480 in interest (before fees). Spread over 20 years, the payment falls to about $149, while interest is roughly $15,800. The lower rate does not protect against the longer term.

A refinance may alter the rate or fees on the much larger home-loan balance. Compare the entire mortgage package rather than focusing on the $20,000 consolidation portion. Discharge, valuation, legal and break costs may also apply.

Cards and unsecured personal loans do not usually place a specific asset behind the debt. Once moved into the mortgage, the home secures the balance. Missing repayments can therefore have more serious consequences.

Consider ownership and guarantees

If the home belongs to one person and the debts belong to another, get legal advice. The owner may be placing an asset at risk for debt they did not originally owe. Joint owners may both need to consent.

A mortgage solution may be unsuitable when the budget is already short, the refinance worsens the main mortgage or the only way to create room is a very long term. Compare an unsecured option and hardship support before changing the home security.

Keep the consolidated debt on its own schedule

If consumer debt is added to a home loan, ask for it to be placed in a separate split where possible. Give that split a repayment schedule that reflects the type of debt being cleared rather than the remaining mortgage term. A credit-card balance repaid over decades can cost far more than expected even when the mortgage rate is lower.

Compare the complete home loan before and after the change. Refinancing may alter the rate, annual package fee or features on the much larger mortgage balance. Add valuation, discharge, legal and establishment costs. A saving on the consolidation portion can be outweighed by a small price increase across the main home loan, so the whole package needs to be shown in dollars.

Test the repayment against changes in rates and household income. The home is security for the new arrangement, which makes missed payments more serious than they were on an unsecured card. If the property is jointly owned, both owners need to understand the debts being moved and any change to their liability. A guarantor should obtain independent legal advice.

Set a review date after settlement and check that every intended debt was paid out. Keep the separate split visible, make additional repayments where the contract allows and avoid reopening cleared card balances without a plan. If the mortgage term is long, the repayment rule matters as much as the starting rate because it determines how quickly the consumer debt actually disappears.

If you proceed, automate the separate split repayment and name it clearly in online banking. Review the balance at least yearly and after any refinance. Without that separation, the consumer debt can disappear into the mortgage balance and remain there much longer than intended, even while the normal home-loan repayments continue.

If debt is added to a home loan, ask the lender to place it in a separate split where possible and set a repayment plan that reflects the shorter-lived debt. This can make the balance easier to track and reduce the chance that it remains in the mortgage for decades. Review the split after each rate change and direct additional repayments to it when your budget allows. The structure does not remove the security risk, but it can make the intended payoff period more visible. Confirm fees, redraw conditions and early repayment rules before relying on this approach.

Frequently asked questions

Can you add card debt to an existing mortgage? The lender must assess the request and the available equity. Money in an offset account reduces interest while it remains there, but it does not make the consolidated debt interest-free. Using redraw increases the home-loan balance, so compare the rate, fees, term and security in the same way.

What if I plan to move or refinance again?

Check early-exit costs and whether the consolidated split will be repaid from sale proceeds. A short holding period may not recover refinance fees. If the home will be sold as part of a separation, get legal and financial advice before adding personal debts to it.

Keep a separate record of the consolidated amount and its intended finish date. Without that record, the balance can become indistinguishable from the mortgage and remain longer than planned.

Sources

Moneysmart: Debt consolidation and refinancing

Moneysmart: Switching home loans

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.