top of page

Debt consolidation: when it can help and when it can cost more

Christian Tucker
2 days ago
6 min read

Updated: 19 hours ago

Insights from AGFB · Checked 2 October 2026 · About 6 minutes

In brief

  • Debt consolidation rolls car loans, personal loans, credit cards and buy now pay later into your home loan, usually at a lower rate and with one repayment.

  • The monthly repayment can fall sharply, but stretching short debts over 25 or 30 years can mean far more interest in total.

  • It is most likely to help when the costs are modest, you close the cleared cards and you keep repaying close to your old amount.

  • If you're already behind, talk to your lenders and a free financial counsellor on 1800 007 007 first.

How does consolidating into your home loan work?

Debt consolidation combines several debts into one loan with one repayment. When that loan is your mortgage, the car loan, personal loan, credit card and buy now pay later (BNPL) balances are paid out and become debt secured by your home.

You can ask your current lender to increase, or top up, your home loan. Or you can refinance to a new lender for more than you owe now and use the difference to clear the other debts.

Either way, you are drawing on your equity, the value of your home less what you owe on it. The lender will usually value the property and reassess your income, expenses and debts.

Lower repayments, more interest: a worked example

Home loan rates are usually lower than card and personal loan rates, and the term much longer, so the repayment falls. In this hypothetical example (illustrative rates, not offers, and no fees), you owe $20,000 on a car loan at 9% with four years left, $12,000 on a personal loan at 13% with three years left, and $8,000 on cards at 20% you plan to clear in three years. Those repayments total about $1,200 a month, with about $9,100 in interest to clear them.

Add the $40,000 to a home loan at 6.25% with 25 years to run, and the extra repayment is about $264 a month, freeing up roughly $935. But the interest on that $40,000 over 25 years is about $39,200, more than four times the original figure, or about $48,700 over 30 years.

Now suppose you keep paying $1,200 a month toward the consolidated $40,000. It would be cleared in a little over three years with about $4,050 in interest, less than half the original $9,100. The lower rate helps, but the repayment you keep up decides the total cost.

Fees and break costs

A new or larger loan can bring application, valuation, legal and government fees, and leaving your current lender usually means a discharge fee. The saving only counts once these are taken out.

Ask for a written payout figure for each debt. Fixed-rate car and personal loans may charge a fee for repaying early, and a car loan with a balloon needs that lump sum paid out too. If your home loan is fixed, refinancing to another lender can mean a break fee, so get that figure in writing.

Equity, LVR and lenders mortgage insurance

Lenders compare the loan with the property's value, the loan-to-value ratio, or LVR. Each sets its own limits on how much it will lend, and its valuation may come in lower than you expect.

If the extra borrowing takes you above 80% of the property's value, lenders mortgage insurance (LMI) may apply. LMI protects the lender, not you, and is paid at settlement or added to the loan. On a hypothetical $800,000 home with $620,000 owing, adding $40,000 lifts the LVR from 77.5% to 82.5%.

The risk changes too. Cards and personal loans are usually unsecured, but once they are in the mortgage, falling behind puts your home at risk.

Close the cards you've cleared

Consolidation only helps if the old debts stay closed. Moneysmart's guidance is to cancel the cards you've paid off and avoid new credit, because a cleared card with its full limit makes it easy for the balance to build again.

Move any direct debits off the card, make sure the balance is zero including interest and fees, then cancel it and ask for written confirmation. Close BNPL accounts you no longer need, as unused limits can still count against you in a future loan application.

When can it make sense?

Consolidation may suit you when the rate gap is large, the costs are modest, your equity keeps you clear of LMI and you can keep repaying near your old level.

It tends to work as a reset rather than a rescue, when the spending behind the debts has been dealt with and the freed-up cash goes to the loan or a savings buffer. Our debt consolidation page explains how Christian can help you compare the options.

When it may cost you more

It may not suit you if the main appeal is a smaller repayment with nothing else changing, if the debts were nearly paid off, or if fees, break costs or LMI would absorb most of the saving. Consolidating a car loan can also mean paying for a car long after you've replaced it.

BNPL is usually interest-free if you pay on time, though fees can apply. Folding it into a home loan can turn an interest-free debt into one you pay interest on for years.

Be wary of any business that rushes you, asks you to sign blank documents or won't put all costs and the rate in writing. Moneysmart suggests checking it is licensed on ASIC's Professional Registers.

If repayments are already hard

If you're behind, borrowing more against your home may not be the answer. Any lender you owe can be asked for hardship help, such as a payment plan or changed repayments, so contact them early.

Moneysmart says a hardship arrangement doesn't affect your credit score, though it shows on your credit report until the listing is deleted after 12 months. The National Debt Helpline offers free, confidential financial counselling on 1800 007 007, and if you can't resolve a problem with a lender, the Australian Financial Complaints Authority (AFCA) is free and independent.

A checklist before you consolidate

  • List every debt with its balance, rate, fees, remaining term and repayment.

  • Get written payout figures, including early repayment fees, break costs and balloons.

  • Add up the new loan's costs, plus any discharge fee.

  • Check whether the extra borrowing could take your LVR past 80% and into LMI.

  • Compare the total interest under each option, not just the monthly repayment.

  • Set an automatic repayment on the consolidated amount close to what you paid before.

  • Cancel the cards and accounts you've paid off, and keep a small emergency buffer.

Common questions

Will consolidating affect my credit score?

Applying for a new or larger loan usually involves a credit check, and several applications in a short time can lower your score. Repaying on time afterwards helps your record.

Are there alternatives to using my home loan?

An unsecured consolidation loan usually has a higher rate than a home loan, but it keeps your home out of it, and a shorter term clears the debt sooner. For card debt, a balance transfer is another option, though a higher rate applies to anything owing when the promotional period ends.

Try the numbers

Use our Repayments calculator to see what a larger home loan could cost each month over different terms, and the Borrowing Capacity calculator for an indicative idea of where a bigger loan may sit. If you're unsure where to begin, Find Your Next Step asks a few short questions and points you to the right tool or enquiry.

Talk it through

If you'd like to know whether consolidating would leave you better off, Christian can work through the numbers with you.

Sources

General information only. This article does not take into account your objectives, financial situation or needs. Your full financial situation and requirements must be considered before any offer or acceptance of a loan product. All lending is subject to the lender's assessment and criteria, and fees and charges apply. Figures and rules are correct as at the checked date shown and can change.

Avantgarde Financial Brokerage Pty Ltd, Corporate Credit Representative 580346, authorised under Australian Credit Licence 389328 held by Connective Credit Services Pty Ltd.

READY TO DISCUSS YOUR FINANCE PLANS?

Guides, calculators and updates explain finance in general terms. Tell us what you're planning and we'll help you work through what applies to your circumstances.

bottom of page