Understanding Refinancing to Consolidate Debt in Victoria

Consolidating debts into your home loan can lower your monthly repayments. The catch is that it also stretches those debts over a much longer time. This article is for Victorian homeowners weighing up whether that trade is worth it.

What Does It Mean to Consolidate Debt Into Your Mortgage?

To consolidate into your mortgage, you refinance your home loan for a higher loan amount and use the extra funds to pay out other debts, such as credit cards, personal loans or car loans. You then make one repayment instead of several.

The extra amount is drawn from the equity in your property. Your lender will usually order a property valuation to confirm what your home is worth, then assess your income, expenses and existing debts to decide how much it will lend. If you want a rough idea of where you stand first, our borrowing capacity page is a sensible starting point.

This can be done with your current lender or by moving to a new one through a refinance. Switching lenders opens up more loan options, but it can come with discharge and application costs, so those need to be weighed up.

A $30,000 Debt Consolidation Example at 6.75%

Adding $30,000 of debt to a 30-year home loan at 6.75% p.a. adds roughly $195 a month to your repayments. The same $30,000 repaid over five years at that rate would cost roughly $590 a month. These figures are illustrative only and use an example rate, not a current offer.

Consider a homeowner in regional Victoria who owes $30,000 across two credit cards and a personal loan. Say the minimum and fixed repayments on those debts add up to $900 a month. This is an assumed figure for the example, and your own repayments will differ. After refinancing, the debts are cleared and the home loan increases by $30,000.

If you pay only the required $195, cashflow improves by about $705 a month, but the debt runs for 30 years. If you keep paying about $590 a month to clear it in five years, cashflow improves by about $310.

The second approach means paying close to the old five-year amount into the home loan, using a linked offset account or extra repayments. The $30,000 is then repaid in about five years instead of 30, while the lower required repayment stays available as a buffer if money gets tight. The outcome depends on the discipline to keep paying extra, which is the next point.

What Is the Main Risk of Consolidating Debt Into a Home Loan?

The main risk is that short-term debts become 30-year debts. If you only make the minimum repayment, you will pay interest on that $30,000 for far longer than you would have on the original cards or personal loan, and the car or card debt will be sitting on your home.

There are two ways to manage this. You can set your repayments to match the original debt's timeframe, as in the example above. Or you can use a home loan with an offset account or redraw facility, so spare cash reduces interest while staying accessible. Redraw and offset features vary by lender, and some loans with these features carry higher fees or rates, so compare the full cost.

Also avoid running the cards back up. Consolidating only helps if the old balances stay at zero afterwards.

Should You Consolidate When Your Fixed Rate Period Ends?

A fixed rate expiry is often a convenient time to consolidate because you can restructure the loan without paying break costs. If you leave a fixed rate loan early, the lender may charge a break fee, which can be significant depending on how rates have moved.

When your fixed term is ending, your lender will usually move you to its variable rate unless you act. That makes it a natural point to review your loan, compare lenders and decide whether to switch to variable, fix again, or split the loan between both. Our fixed rate expiry page explains the options in more detail.

A split loan has its own trade-off. The fixed portion gives repayment certainty, but extra repayments are often capped on fixed portions, which can limit how quickly you clear the consolidated debt.

How the Refinance Process Works for Debt Consolidation

The process starts with a loan review, then a lender comparison, an application, a valuation and settlement. Timeframes vary by lender and how quickly your paperwork is ready.

A broker will look at your current loan, your other debts and your goals, then compare lenders for suitable options. Your refinance application will show your income, your living expenses and the balances and limits on every debt you want to pay out. Lenders look closely at credit card limits, so closing cards you no longer need before applying can help your assessment.

Once the lender approves the loan and the valuation is in, the new lender pays out your old loan and your other debts directly. If you are not sure whether your current loan is still working for you, a loan health check is a practical first step before you decide on anything.

Debt consolidation suits some households and not others, and the right structure depends on your equity, income and discipline. If you are considering it, speak to a licensed professional about your own situation, and talk to your accountant if tax questions come up. Call one of our team or book an appointment at a time that works for you, and we will run the numbers on your actual debts.

Frequently Asked Questions