If high-interest credit cards and personal loans are squeezing your monthly budget, debt consolidation could be the financial reset you need. By working with a Mortgage broker in Brisbane to use the available equity in your home, you can merge these costly debts into your mortgage, securing a lower interest rate and a single, manageable monthly repayment. Instead of juggling multiple bills and due dates, you regain control of your cash flow and potentially save thousands in interest.
What Is Debt Consolidation?
Debt consolidation is the process of combining your debts into one single debt. Some people may consolidate their loans into an existing personal loan or credit card balance, but the best way is to consolidate it into your home loan. You transfer the outstanding balances of debts with higher interest rates from different lenders into the total balance of your mortgage repayment. Rather than paying off different loans separately, you can consolidate them into one monthly repayment.
Why Should I Consolidate Debt?
There are many reasons why you should consider consolidating your debts:
- you are finding it difficult to track what repayments are due and when. This usually happens if you have many debts from different providers.
- you are also struggling to keep your debts under control
- you are are falling behind in payments
In the cases above, consolidating your debts into one can help you regain control of your finances by making it easier to control your spending and borrowing habits.
Read more: How to pay off your home loan faster.
Personal Loan vs. Home Equity: Which is better?
When you decide to consolidate debt, you generally have two main options: taking out a new unsecured personal loan or accessing your home equity (refinancing).
While a personal loan might seem like a quick fix because it doesn’t require a property valuation, it often comes with a much higher price tag. Because the debt is “unsecured” (not backed by an asset like your house), lenders charge a premium for the risk. In contrast, using your home equity secures the debt against your property, allowing you to access “home loan rates”—currently the lowest rates in the market.
The Cost Comparison: Short-term Pain vs. Long-term Gain
The biggest difference lies in the loan term and the interest rate. Personal loans are typically repaid over 5 to 7 years, meaning your monthly repayments remain high. Consolidating into your home loan stretches that debt over 25 or 30 years, which drastically reduces your monthly commitment—but there is a catch you need to be aware of.
Let’s look at a real-world comparison for a $30,000 debt:
Feature | Personal Loan (Unsecured) | Home Equity (Secured) |
Interest Rate (Est.) | 14.50% p.a. | 6.20% p.a. |
Loan Term | 5 Years | 30 Years |
Monthly Repayment | ~$705 | ~$184 |
Cash Flow Impact | High monthly cost | $521 monthly saving |
Total Interest Paid | ~$12,300 | ~$36,200 |
Warning: Don't fall into the "30-Year Trap"
As you can see in the table above, consolidating into your home loan saves you over $500 a month right now. This is a lifesaver for your household budget.
However, if you take the full 30 years to pay off that $30,000, you will end up paying more interest in the long run ($36,200 vs $12,300).
The Hunter Galloway Strategy
To get the best of both worlds, we recommend a disciplined approach:
- Consolidate into your home loan to secure the lower 6.20% interest rate.
- Maintain your repayments (or pay slightly more than the minimum) to pay off that specific $30,000 chunk in 5–7 years, rather than 30.
By doing this, you get the safety net of lower required repayments if you have a bad month, but you avoid the long-term interest cost.
What Debts Can I Consolidate?
You can consolidate the following debts into your home loan:
- Credit card loans
- Personal loans
- Car loans
- Tax debts
- AfterPay and similar buy now pay later services
Generally, the best debts to consolidate into your home loan are unsecured, high-interest debts. Combining these debts into your home loan will lower the interest rate you are paying on these debts.
Read more: Positive credit reporting.
How Much Debt Can I Consolidate Into My Home Loan?
How much debt you can consolidate into your home loan depends on the type of lender you are using and how much equity is available in your home. With some lenders, you can consolidate up to 5 debts valued between $50,000 and $100,000.
On the other hand, non-bank lenders can offer unlimited debt consolidation on the condition that you have enough equity in your home. When deciding how much debt to consolidate into your home loan, it is important to remember that debt consolidation is supposed to put you in a better financial position.
For example, it is not financially prudent to consolidate your debts and end up with Lenders Mortgage Insurance because your LVR is now over 80%. This is why it is important to talk to an expert mortgage broker before consolidating debts into your home loan.
How to increase equity for debt consolidation:
There are a few quick and easy tricks to try and increase the equity in your property:
The first is getting a licensed real estate agent out to do an appraisal. Generally, it’s a good idea to get one or two appraisals in which they’ll show you properties in the area that have recently sold. If these appraisals are above what the bank valuations are, that’s great news. You can then call your broker and ask them to arrange one or two valuations with differing banks and provide these appraisals to the valuers. They can use those comparative sales to increase the value of your property. Realistically, the best way we find to get more equity on your property is just getting other valuations.
The good thing is these days, banks will do different forms of valuations, so in some cases, their electronic valuations might end up being more than what a full valuation is with another bank. It’s all getting a bit technical, but once you work with a broker, You might be able to get five different valuations.
We had a client who bought a house a couple of years ago for $700,000. We got one bank valuation at $800,000, the existing bank at $720,000, and another at $740,000 – that’s over 10% of the property’s value from what they originally bought between the banks. So, having different valuations can make all the difference if you’re consolidating your debt.
Some lenders are now restricting debt consolidation!
We have noticed that some lenders are restricting debt consolidation so that they keep it separate from the home loan. So, in an example where you’ve got a $400,000 home loan and $50,000 in credit card debt, they won’t let you combine it and do a $450,000 home loan. They’ll make you keep it separate. They might give you a five-year term to finish paying off the credit card debt.
How Do I Qualify For A Debt Consolidation Loan?
Debt consolidation loans are not available to everyone, but if you meet the following criteria, you may qualify for a debt consolidation loan:
- The home is owner-occupied.
- Your mortgage repayments have been on time for at least 6 consecutive months.
- You have not missed any repayments on your credit card and personal loans.
- You are in a good financial position and can repay the loan.
- You have stable employment.
- You have a good credit score.
Some lenders might be lenient towards missed repayments if they were caused by something major like a divorce, bereavement or sickness. Your mortgage broker can explain this to the lenders.
Non-bank lenders may consider consolidating your bank even if your credit history is not so good, but you may have to pay higher interest rates.
Read more: 27 ways to get unconditional approval.
Can I Consolidate If I Have Defaults or Arrears?
If you have been declined by a major bank because of a default, judgment, or mortgage arrears, do not panic.
While the “Big 4” banks generally require a flawless credit history, there is an entire tier of Specialist Lenders (sometimes called “Non-Conforming Lenders”) in Australia designed specifically to help in these situations. Lenders like Liberty Financial, Pepper Money, and Bluestone look at your current ability to repay the loan rather than just your past mistakes.
The "Clean Up" Strategy
We often use a specific strategy for clients with bad credit:
- Consolidate now using a specialist lender. The interest rate will be higher than a standard bank (e.g., 1–2% higher), but it stops the bleeding from 20%+ credit card interest.
- Make perfect repayments for 12 to 24 months. This demonstrates to the credit bureaus that you are back on track.
- Refinance back to a major bank once your credit score has improved and the default listing has “aged” or dropped off.
Specific Issues We Can Often Solve:
- Paid vs. Unpaid Defaults: Some specialist lenders will accept unpaid defaults if they are under $1,000 (e.g., a disputed Telco bill). Larger defaults usually need to be paid, but we can sometimes use the loan proceeds to pay them at settlement.
- Mortgage Arrears: If you are one or two months behind on your home loan, we can often still refinance you, provided you have a reasonable explanation (like a temporary loss of income or illness) that has now been resolved.
- Part IX Debt Agreements: If you are currently in a Part IX agreement, you generally cannot refinance until it is discharged. However, if you have finished your agreement, we can often help you get a home loan immediately, whereas major banks may make you wait another 5 years.
What Documents Are Required?
The documents required for debt consolidation are similar to those required for a regular home loan application, with some extra documentation. The list includes, but is not limited to:
- Most recent bank statements—usually for the past 3 months
- Payslip
- Your identification documents
- Current assets and liabilities statement
- PAYG applicants also require:
- Recent group certificate
- Recent tax return
- If you are self-employed, you can qualify for an alt-doc loan.
These requirements are just a guideline. Each lender has different requirements, and your mortgage broker can help you gather and assess the needed documents.
Read more: Maximise your borrowing power.
How Much Can I Borrow?
You need to have enough equity in your property before you can consolidate your debt. Depending on the lender, you can borrow between 75% to 95% LVR.
If your repayments and credit history are flawless, you can borrow up to 95% of the value of your home. Some lenders may allow you to borrow up to 80% LVR if you have made your payments on time in the last 6 months, even if you may have missed some payments in the past.
Some banks are more flexible than others and may allow you to borrow up to 75% LVR even with a really bad credit history.
Read more: What is Loan to Value Ratio?
What Interest Rates Will I Get?
With a debt consolidation loan, you will be eligible for standard home loan interest rates. Some lenders may offer a lower interest rate for refinancing. As we mentioned above, if you have a bad credit history, you may have to use a non-bank lender who may charge you a higher interest rate. The advantage of consolidating is that instead of paying multiple high interest rates on your other loans, you can pay a single lower interest rate for your home loan. Let’s look at an example below.
Type of Debt | Interest Rate | Monthly Interest repayments | Total debt |
Before consolidation | |||
Home loan | 6.85% | $3,995 | $700,000 |
Car loan | 17% | $425 | $30,000 |
Credit card | 21% | $175 | $10,000 |
Total | $4,595 | ||
After consolidation | |||
Home loan | 6.85% | $4,224 | $740,000 |
Total monthly saving: interest before consolidation – interest after consolidation $4,595 – $4,224 = $371 | |||
Read more: Fixed vs Variable Interest rates
How Much Are Fees And Charges For Debt Consolidation?
The fees and charges for debt consolidation can include:
- Government Fees: Mortgage Registration Fee (approx. $120–$200 depending on your state) and a Discharge Fee for your old mortgage (approx. $350 per security).
- Application & Valuation Fees: While some lenders charge $200–$600, many of the lenders we work with will waive these to win your business.
- Establishment & Service Fees: Ongoing monthly or annual fees (approx. $395 p.a. for package loans).
- Early Repayment Fees: If you are on a fixed rate, you may have to pay “break costs.”
Some banks may waive fees and charges, so talk to your mortgage broker to see if you can get some of the fees and charges waived.
Advantages Of Debt Consolidation
Consolidating your debts into your home loan has many advantages, including:
- You will only have one (lower) interest rate
- You can save money on your monthly interest repayments (as we calculated above)
- Debt management becomes easier
- You can use the savings to pay off your mortgage faster
- You only have to remember the repayment date for one loan
- Consolidating your debts can protect you against the risk of bankruptcy
- You will not have to keep track of different charges and fees for many loans
- You can get access to standard home loan interest rates – or lower.
- Your cash-flow position can improve greatly.
Read more: Barefoot Investor Bank Accounts explained
Disadvantages Of Debt Consolidation
As is the case with everything, debt consolidation has its disadvantages. You must decide whether the advantages outweigh the disadvantages. Here are the disadvantages:
- Home loans are paid over a longer period of time—usually 30 years—so you might end up paying more interest in the long term. You can mitigate this by making extra repayments whenever you can.
- Consolidating debts into your home loan will increase your home loan balance.
- Increasing the home loan balance may increase your LVR, which can ultimately affect your interest rates.
- If your LVR increases to above 80%, you may be required to pay Lenders Mortgage insurance, which can be thousands of dollars.
- Consolidating your debts may reduce any equity you may have gained from paying off your mortgage.
- You may have to pay set-up fees for the new loan.
If you are thinking of consolidating your debts into your home loan, talk to your mortgage broker to find the best way to do it!
Bonus: Good Debt vs Bad Debt
What is good debt, and what is bad debt? The simple way of looking at it is that bad debt will cost you money, whereas good debt will potentially make you money.
Examples of good debt:
- Student loans or HELPS or HECS debt. This is an investment in the future which will help you earn more income in the future.
- Investment or business loan. If you are buying an investment property or starting a business, you are actually going to be making more money from that money,
- Home Loan (Mortgage). This is more of a neutral debt because you are not necessarily going to make money from it, but it is going to stop you from paying rent and potentially build some equity.
Examples of bad debt:
- Car loan. Interest rates are very high, and in about 5 years, the value of the car may be less than half what you bought it for because cars are depreciating assets.
- Personal loan. If you get a personal loan to, say, pay for a holiday, you may spend years and years paying that off because the interest rates can be up to 10% more!
- Credit card debt. This is potentially the worst type of debt because the interest rates are crazy high, and you may end up paying back up to 5 times the price you purchased for.
Bonus: How To Manage Your Debt(s)
Debt consolidation is not a magic potion that can reduce your level of debt. All it does is allow you to manage your repayments easily. Debt consolidation should be done together with a plan to manage your finances.
Here are some tips for managing your debts:
- Change your spending patterns. It’s as simple as not buying what you cannot afford. Distinguishing between wants and needs will help you change your spending patterns.
- Use a budgeting tool. There are plenty of apps that you can use to keep track of your expenses. If not, a regular spreadsheet can do the job just fine.
- Make as many extra repayments as possible to reduce your loan balance.
- Once you have consolidated your debts, close all the credit card accounts. If you continue to use them, you will increase your debt. Some accounts may charge you holding fees even if you are not using the account. So close off all the credit card accounts.
- Speak to a professional. If you are still struggling to manage your debt, you may need to speak to a debt counsellor or financial advisor to help you manage your spending habits.
Debt Consolidation FAQs
Can I consolidate my HECS/HELP debt into my mortgage?
Yes, you can release equity from your home to pay out your HECS or HELP debt. However, you should weigh the pros and cons first. While paying it off can increase your borrowing power for future loans, HECS is an interest-free debt (indexed only to inflation), whereas your mortgage charges interest. We can help you calculate if the cash flow benefit is worth the cost of moving it to a secured loan.
Is Debt Consolidation the same as a Part IX Debt Agreement?
No, they are completely different. Debt consolidation involves taking out a new loan to pay off old ones, which can actually improve your financial standing. A Part IX Debt Agreement is an act of bankruptcy that severely damages your credit score and stays on your credit file for 5 years (or longer in some databases). We recommend consolidation specifically to avoid needing a debt agreement.
Are there any "break costs" if I consolidate my fixed-rate home loan?
Yes, if your current home loan is on a fixed interest rate, breaking it early to consolidate debt may trigger “break costs” or “economic costs.” These fees can range from a few hundred to thousands of dollars, depending on how much interest rates have moved. If you are on a variable rate, there are usually no break fees, only a small discharge fee.
Does debt consolidation hurt my credit score?
In the short term, applying for a new loan may cause a small, temporary dip in your credit score due to the “hard inquiry” on your file. However, in the long term, debt consolidation usually improves your credit score. By paying off multiple maxed-out credit cards and maintaining a single, consistent mortgage repayment, you demonstrate good financial conduct, which boosts your score over time.
Can first-home buyers consolidate debts into their home loan?
Generally, no, because first-home buyers usually do not have existing equity. However, there is an exception: Guarantor Loans. If your parents act as guarantors, some lenders will allow you to borrow up to 105% or 110% of the property value, using the extra funds to consolidate personal debts like a car loan or credit card at the time of purchase.
What if I have debts with multiple different lenders?
This is standard practice. You do not need to have all your debts with one bank. When we arrange your consolidation loan, the new lender will pay out your car loan from Bank A, your personal loan from Bank B, and your credit card from Bank C directly. You will then be left with just one repayment to the new lender.
Can I consolidate ATO tax debt into my home loan?
Yes, it is possible to consolidate tax debt, but most major banks will not approve a loan for this purpose. We typically use specialist lenders who allow “ATO debt payout” as a loan purpose. This is often a smart move for self-employed borrowers, as mortgage rates are significantly lower than the GIC (General Interest Charge) applied by the ATO on overdue tax.
How long does the debt consolidation process take?
The process usually takes between 2 to 4 weeks. This includes the time to assess your application, value your property, and for the new lender to settle the funds. If you are under financial pressure, let your broker know immediately so we can prioritize lenders with faster turnaround times.
Next Steps And Consolidating Your Debts
If you’re ready to consolidate your debts, we are here to help you. Our team at Hunter Galloway is here to help you buy a home in Australia.
Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.
If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.
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