Debt Consolidation Mortgage: Everything You Need To Know

A debt consolidation mortgage is a way of combining multiple debts, such as credit card balances, personal loans, and car loans, into a single, larger home loan. You can get a new mortgage or refinance into a bigger one to include other debts, benefitting from the lower interest rate of mortgages than the high rates that typically accompany other debts.

This is a very useful approach for anyone who has multiple high-interest debts to their name. As long as you manage this consolidation method wisely, you’ll actually be able to save on quite a lot of money.

We’re going into a detailed look at debt consolidation with mortgage in this guide. So if you’re paying high interest on multiple debts, this will be worth the read.

Understanding Debt Consolidation

Before we move any further, we need to know what debt consolidation means in the first place. It means combining multiple existing debts into a single new loan, often with a lower interest rate than what you’re currently paying for the multiple debts.

It’s a way to make your debt management easier, while also potentially bringing down the interest you pay, which ultimately gives you the peace of mind. And if you’re able to meet all these, you’re also potentially avoiding the risk of mortgage stress.

Debt consolidation is only ideal if it eases your burden in some way, either by making budgeting easier or by bringing down your interest. Getting both these benefits is ideal, but that may not always happen.

What’s a Debt Consolidation Mortgage?

It’s basically a mortgage that you get or refinance into, with the goal of combining other debts (credit cards, personal loan, car loan, etc.) you have into a single home loan.

We’ll look at an example to get a better idea…

Let’s say you have:

• A $5,000 credit card debt that charges you 20.99% annually (as per the current average credit card rate in Australia.)

• And an unsecured $15,000 personal loan that charges 13.87% annually (as per the current average personal loan rate in Australia.)

In this case, you’re paying $6,900 per year on interest alone for your unsecured debts.

But the current average mortgage interest rate is 6.24% annually, so consolidating your unsecured debts into this mortgage would help you benefit from this lower interest cost.

So, the same amount you paid in interest alone towards the unsecured loans will actually pay down interest + much of the principal when paid towards the consolidated mortgage.

Refinancing Mortgage for Debt Consolidation

If you already have a mortgage, you’ll need to refinance into a bigger one to consolidate your other debts. In this case, you can only use the “usable equity” in your home, which is up to about 80% of your home’s value minus the existing mortgage balance.

And keep in mind that as with any home loan, the lender will assess your income, expenses, and credit history under Australian responsible lending rules. This means you must prove you can afford the larger repayment over the full term.

If you’re looking to consolidate your high-interest debts into a mortgage, we can help you find a suitable home loan solution.

As one of the top mortgage brokers in Australia, you can get access to 30+ lenders and 2,000+ loan products through us.

Find your ideal debt consolidation mortgage with our unbiased, A–Z guidance today. All for FREE, at zero extra cost to you! Contact us today.

Benefits of Debt Consolidation With Mortgage

• Single, lower repayment: Combining debts into a home loan usually gives you one lower repayment each month. Mortgages typically have much lower interest rates than credit cards or personal loans, so you can free up cash.

• Simplified budgeting: With one loan and one repayment, it’s easier to keep track of your debt. You can choose the repayment schedule (weekly or monthly) to suit your pay cycle.

• Potential interest savings: Mortgages usually have a lower interest rate than other loans, so you can potentially save on interest. You can obviously cut your total interest costs by rolling high-rate debt into a new home loan, especially if you stick to repayments.

• Fixed timeline (if fixed rate): By choosing a fixed-rate home loan, you lock in repayments for the loan’s term and know exactly when you’ll be debt-free

• Opportunity to repay faster: If you continue the same total repayment amount or make extra payments on the mortgage, you could pay off the consolidated balance faster than the original unsecured debts. 

• Offset/redraw features: If your consolidated loan has an offset account or redraw facility, extra payments or savings can reduce interest charged. Look for loan features (offset, redraw) that suit you when consolidating.

Drawbacks of Getting a Debt Consolidation Mortgage

• Potential for more interest overall: Even if the interest rate is lower, extending shorter debts into a long mortgage results in more interest paid over time.

• Home at risk: Your consolidated loan will be secured against your house. Failing to repay on time means the lender can sell the asset.

• Less repayment flexibility: Credit cards can be paid off anytime, but a mortgage is less flexible. Depending on your loan, you may face restrictions or fees on extra repayments.

• Fees and costs: Home loans have costs. You may pay application fees, valuation fees, stamp duty on any new loan, and possibly Lenders Mortgage Insurance (LMI) if borrowing above 80% LVR. 

• Temptation to spend: Having easy-to-access debts (like credit cards or personal loan) paid off can free up credit lines. This may tempt you to spend and potentially fall back into even more debt!

• Opportunity cost: Using home equity for debt means less equity for future needs (like renovations or kids’ education). Weigh whether an alternate approach (budgeting, downsizing, etc.) might be better for you.

• Regulatory restrictions: APRA-approved lenders follow strict lending standards. If your debt ratio is already high or income low, you may not qualify for enough extra borrowing. 

Is Getting a Debt Consolidation Mortgage Right for You?

Since this approach means you have to start carrying a bigger debt, we’d recommend to only consider a debt consolidation mortgage safely. Here’s a checklist we created of the ideal person suitable for getting a debt consolidation mortgage:

• You’re a homeowner with several high-rate debts (credit cards, personal/car loans).

• You have enough usable equity (80% of property value minus current mortgage balance, if any).

• You have good, stable finance that can handle the new repayment commitment. We suggest you use our free mortgage repayment calculator to figure out how much you’d be asked to repay.

• You should be ready to handle a potentially larger loan for many years. If you expect big life changes soon (job change, relocation, etc.), consolidation may add risk.

• You must be disciplined enough to stick to the plan. If you’re not addressing any overspending habits, the benefit may be temporary.

If you check all these boxes, then a debt consolidation mortgage might be right for you. But still, we’d suggest you to talk to a licensed mortgage broker or an independent finance professional. 

They can assess whether your situation allows for a debt consolidation mortgage and that it can actually benefit you.

Alternatives to a Debt Consolidation Mortgage

While getting a debt consolidation mortgage is one way to better debt management, there are other alternatives to consider if you don’t want to risk your home.

Here are six alternatives to a debt consolidation mortgage…

Personal Loan Consolidation

Instead of a mortgage, you could also consider taking a large unsecured personal loan to pay off other debts. 

This is helpful if you just want the peace of mind with an easier-to-manage debt and want to avoid risking your home. 

But here, the interest rate may be higher than a mortgage, and loan sizes are usually smaller.

Refinance for Rate Savings Only

You can refinance your home loan at a lower rate without taking extra cash out, just to reduce repayments. 

While this won’t pay your other debts directly, it could save you money on the existing mortgage, which you can use to repay extra on your other
debts.

Budget & Negotiate

Sometimes restructuring budgets, cutting expenses, or increasing income is enough.

And if your current financial struggle is temporary, you can also contact each lender for hardship assistance or negotiate a lower repayment until your financial situation recovers.

Downsize, Asset Sale, or Drawdown

Consider these three options as your last resort.

If you want to pay off all your debts without increasing your debt balance, consider selling your home. You can use the sale amount to clear all debts, and use the rest of the fund to purchase a smaller home.

Or if you just want to pay off all your high-interest debts, you can sell a smaller asset (your car, second property, etc.) to pay them down. 

Even better, you can withdraw savings, if you have any. Although it would eat your savings partly or whole, this is the closest you can get to paying off your debts without actually losing anything.

While these options aren’t “consolidation” per se, they do help in reducing debt without increasing your overall debt.

Please note that this blog post acts as general advice only. This information has been prepared without taking your unique objectives, financial situation, or needs into account. Kindly consider its appropriateness and seek independent advice before acting.

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