Refinancing to Consolidate Debt

Q: Is refinancing to consolidate debt worth it?

It can reduce monthly repayments but may increase total interest over the life of the loan if short-term debts are rolled into a long-term mortgage.

Is refinancing to consolidate debt a good idea? Refinancing to consolidate debt can reduce your monthly repayments and simplify your finances, but it may increase the total interest you pay over time if short-term debts are rolled into a long-term mortgage. It is important to weigh both the short-term benefits and long-term costs.

How debt consolidation through refinancing works

Debt consolidation refinancing involves rolling other debts — such as credit cards, personal loans, or car finance — into your home loan. Instead of making multiple repayments to different lenders at different interest rates, you make a single repayment on your mortgage.

Because home loan interest rates are typically much lower than credit card or personal loan rates, your overall monthly repayment can decrease significantly.

The benefits

Lower monthly repayments — combining debts under a lower interest rate can reduce the total you pay each month
Simpler finances — one repayment instead of several makes budgeting easier
Potential lower interest rate — home loan rates are typically lower than personal loan or credit card rates

The risks you need to understand

Important: Rolling short-term debts into a 25 to 30 year mortgage may reduce your monthly payments, but it can significantly increase the total interest you pay over the life of the loan. For example, a $20,000 credit card balance paid off over 3 years at 18 per cent costs approximately $5,800 in interest. The same $20,000 added to a 25 year mortgage at 6 per cent costs approximately $18,600 in interest — more than three times as much.

Debt consolidation through refinancing is not a free lunch. While it can provide genuine cash flow relief, you need to understand what it costs you in total interest. The key is to have a plan: consolidate the debt, then make extra repayments to pay it down faster than the minimum mortgage term.

When debt consolidation makes sense

You have multiple high-interest debts that are difficult to manage
You need cash flow relief to avoid missed payments or financial stress
You commit to making additional repayments to pay the consolidated amount down faster

When it may not be the right move

You would be extending the repayment period on debts that could be paid off sooner
Consolidating would require paying LMI due to reduced equity
There is a risk of accumulating new debt on cleared credit cards

A broker can help you run the numbers and see the full picture. Read our comprehensive guide to refinancing your mortgage for more on how the process works.

Want a clear picture of your debt consolidation options?

Book a free consultation

Frequently asked questions

Is refinancing to consolidate debt worth it?

It can be worth it if it reduces your monthly repayments and provides cash flow relief. However, rolling short-term debts into a long-term mortgage can significantly increase total interest costs. Make sure you compare the total cost, not just the monthly repayment.