Guide · Debt consolidation Is consolidating debt into my home loan a good idea?
It can be, or it can quietly cost you tens of thousands. Rolling cards and personal loans into your mortgage lowers the repayment, but a lower repayment isn’t a lower cost. Here are the pros, the cons and the numbers.
Key takeaways
- Consolidating can turn several repayments into one, at a lower rate, with a lower monthly repayment.
- Over 25 years, $50,000 of debt can cost about $60,751 in interest at an illustrative 7.49%, against about $19,247 if you kept paying it off as now.
- Keep paying what you pay now and the same $50,000 could cost about $6,516, cleared in 3 years 4 months.
- It moves unsecured debt onto your home, and only works if the old cards stay closed.
The pros
- One repayment instead of several, on a day you choose.
- A home loan rate instead of card and personal loan rates.
- A lower monthly repayment, which can take pressure off the budget.
- A clear end date, if the repayment is set up to clear the debt.
The cons
- Stretched over 25 or 30 years, it can cost more in total interest.
- Unsecured debts become secured against your home.
- Refinancing has costs: discharge, government and lender fees, and any break costs.
- If the cards get used again, you end up with both debts.
The same $50,000, three ways
Seven debts at an average 17%, repaid at $1,443 a month, against the same debt rolled into a home loan at an illustrative 7.49%.
| Repayment | Cleared in | Total interest | |
|---|---|---|---|
| Keep paying as now | $1,443/mo | 4 years | $19,247 |
| Roll in over 25 years | $369/mo | 25 years | $60,751 |
| Roll in, pay halfway | $910/mo | 5 yrs 8 mths | $11,424 |
| Roll in, keep paying the same | $1,443/mo | 3 yrs 4 mths | $6,516 |
Illustrative calculation only, not a quote, an offer, a comparison rate or a client result. Debt portion only, monthly principal and interest. Excludes fees, which reduce any benefit. Change the figures on the debt consolidation calculator.
When consolidating may make sense
- You own your home and have equity.
- You have several debts at high rates, around $20,000 or more in total.
- You’ll set the new repayment to clear the debt in years, not decades.
- You’re ready to close the cards that get paid out.
When it’s the wrong move
- You’d only ever pay the minimum on the new loan.
- Spending, not interest, is what’s building the debt.
- The debts are small enough that fees outweigh the saving.
- You’re behind on the home loan itself. Talk to your lender about hardship first.
The alternatives
- Highest rate first. Pay minimums on everything, and every spare dollar on the most expensive debt.
- Ask your lenders. A hardship arrangement or a lower rate can be a phone call.
- A balance transfer. A low-rate period can help, if the balance is cleared before it ends and the old card is closed.
- Free financial counselling. The National Debt Helpline, 1800 007 007, is free and independent.
If consolidating isn’t right for you, I’ll say so. It’s one of the options I put side by side, not the only one.
FAQ Questions clients ask
Is it a good idea to consolidate debt into my mortgage?
It can be, if you keep paying close to what you pay now. Rolling debts into a home loan usually lowers the repayment and the rate, but stretched over 25 or 30 years it can cost far more in total interest, and the debt becomes secured against your home.
Does debt consolidation hurt your credit score?
Applying for a new loan adds an enquiry to your credit file, which can move your score a little. Paying debts on time afterwards, and closing the cards that were paid out, helps your file over time.
What are the alternatives to debt consolidation?
Paying the highest-rate debt first while making minimums on the rest, asking your lenders for a hardship arrangement, a balance transfer card used with care, or talking to the free National Debt Helpline on 1800 007 007.
Should I close my credit cards after consolidating?
Usually, yes. Most lenders require the debts being paid out to be closed. Any card you keep is counted at its full limit when lenders work out what you can borrow, and if it gets used again, you end up with both debts.
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