Refinance to consolidate debt and save on interest

Refinancing to consolidate debt can cut your monthly costs

Refinancing your home loan to consolidate debt means rolling credit cards, personal loans, and car finance into your mortgage where the interest rate is lower. Instead of juggling multiple repayments at different rates, you make one monthly payment. This can reduce your total monthly outgoings and make budgeting more manageable.

In Reservoir, we regularly see households managing a mortgage alongside car loans, store cards, and personal debt from unexpected expenses. With property values in the suburb ranging from unit blocks near Broadway to family homes closer to Edwardsfield Reserve, many homeowners have built up enough equity to make this option worth considering.

When does consolidating debt into your mortgage actually save you money?

Consolidating debt saves money when the interest you pay on your mortgage is lower than what you're currently paying across all your other debts, and when you maintain discipline around repayments. Personal loans often sit between 8% and 14%, while credit cards can charge 20% or more. If your mortgage sits below those rates, moving that debt across reduces the cost of servicing it.

Consider a scenario where someone owes $15,000 on a credit card at 19%, $20,000 on a car loan at 10%, and $10,000 on a personal loan at 12%. Their monthly repayments across those three debts might total around $1,450. If they refinance their mortgage and add that $45,000 to the loan amount at a variable interest rate closer to 6%, the monthly cost of servicing that debt drops significantly, often freeing up several hundred dollars each month.

The catch is the loan term. Stretching debt repayment over 25 or 30 years means you pay less each month, but more in total interest over time unless you make additional repayments. A loan health check helps identify whether the monthly relief justifies the longer repayment period based on your circumstances.

What happens to your equity when you consolidate debt?

When you consolidate debt through refinancing, you're accessing equity in your property. Your loan amount increases, and your available equity decreases. If your home is worth $650,000 and you owe $400,000, you might have around $250,000 in equity. Adding $45,000 of debt to your mortgage reduces that equity buffer to around $205,000.

Lenders typically allow you to borrow up to 80% of your property's value without paying Lenders Mortgage Insurance. In the example above, 80% of $650,000 is $520,000. If you're refinancing to $445,000, you're still well within that threshold. However, if your existing loan sits close to that 80% mark, consolidating additional debt might push you over, triggering insurance costs that offset the savings.

Does refinancing to consolidate debt affect your home loan features?

Refinancing gives you the chance to review whether your current loan structure still works. Many homeowners in Reservoir originally took out their mortgage years ago and haven't reassessed whether they're getting value from features like offset accounts or redraw facilities. When you refinance to consolidate debt, you can switch lenders or loan products to access those features if you don't already have them.

An offset account linked to your mortgage reduces the interest you pay by offsetting your savings balance against the loan amount. If you have $10,000 sitting in an offset, you only pay interest on the remaining loan balance. A redraw facility lets you access any extra repayments you've made above the minimum, giving you flexibility if you need funds later.

Switching from a fixed interest rate to a variable interest rate during a refinancing process also opens up these features, as fixed rate loans often come with restrictions on additional repayments and limited access to offset accounts.

How does the refinance application process work when consolidating debt?

Lenders assess your refinance application based on your income, expenses, existing debts, and the property valuation. When you're consolidating debt, they want to see that rolling those commitments into your mortgage improves your financial position rather than masking a spending problem. They'll review your credit history, payslips, and bank statements to confirm you can service the higher loan amount.

The property valuation determines how much equity you can access. If the lender's valuation comes in lower than expected, you may not be able to consolidate as much debt as planned. In Reservoir, where some streets have seen stronger capital growth than others, understanding your property's current value before applying prevents surprises during the process.

Most lenders also require you to close the credit cards and personal loans you're consolidating. This prevents you from paying off those debts with the mortgage and then running them up again, which would leave you worse off.

Should you consolidate all debts or keep some separate?

Not every debt is worth consolidating. If you have a car loan with only six months remaining, paying it off as planned might make more sense than adding it to a 30-year mortgage. Similarly, if you're managing a personal loan at a low promotional rate that expires soon, factor in what the rate will jump to before deciding.

Focus on consolidating high-interest debts where the gap between your mortgage rate and the existing rate is significant. Credit cards and older personal loans are usually the prime candidates. Low-rate debts with short remaining terms often cost you less if you leave them alone.

If you're also looking to refinance to reduce your rate, combining both goals in one application can maximise the benefit and reduce the hassle of multiple refinancing rounds.

What do Reservoir homeowners need to consider before consolidating debt?

Reservoir's mix of older homes, townhouses, and newer developments means property values vary depending on location and condition. Homes near Reservoir Station or close to Edwardsfield Reserve tend to hold value well, while properties requiring renovation might see more conservative valuations from lenders. Knowing where your property sits in that range shapes how much equity you can realistically access.

Many Reservoir households are also balancing costs related to ageing housing stock, from weatherboard exteriors needing maintenance to outdated plumbing and electrical systems. If consolidating debt frees up cashflow that you then redirect toward essential renovations, you're improving both your financial position and your property's long-term value.

The other consideration is what happens after you consolidate. If you clear your credit cards but don't address the spending patterns that created the debt, you risk ending up with both a larger mortgage and new credit card balances within a year or two. Refinancing to consolidate debt works when it's part of a broader plan to improve your financial position, not just a short-term fix.

Call one of our team or book an appointment at a time that works for you. We'll review your current debts, your property's equity position, and run the numbers to confirm whether refinancing to consolidate delivers the outcome you're after.

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