Top tips to consolidate debt into your home loan

Consolidating debt into your mortgage during separation can reduce your monthly repayments by several hundred dollars and create breathing room while you rebuild your financial position.

When you're going through a separation, you might be managing legal costs, setting up a new household, or covering expenses that were previously shared. Credit cards, personal loans, and car loans often carry interest rates between 8% and 25%, while a mortgage typically sits well below that. Moving those debts into your home loan can lower your overall monthly commitment and give you more control over your cashflow. That said, it's not the right move for everyone, and lenders apply specific criteria when assessing whether they'll approve it.

How debt consolidation refinancing works

You borrow a larger amount against your property to pay out existing debts, then service a single loan at a lower interest rate. If you owe $320,000 on your mortgage and have $25,000 across credit cards and a personal loan, you refinance to $345,000 and use the additional funds to clear those higher-interest debts. Your monthly repayment increases slightly because the loan amount is higher, but you're no longer making separate payments on the cards and personal loan, which usually results in a lower total monthly commitment.

Lenders assess this type of refinance by looking at your borrowing capacity, the available equity in your property, and whether consolidating the debt genuinely improves your financial position. They'll want to see that you're not simply freeing up credit limits to accumulate more debt.

What you'll need in equity to consolidate debt

Most lenders will require you to keep at least 20% equity in your property after the refinance. If your property is valued at $500,000 and you want to consolidate $30,000 in debt, your total loan amount after refinancing would be the current mortgage balance plus the $30,000. As long as that total doesn't exceed 80% of the property value, you'll generally avoid paying Lenders Mortgage Insurance (LMI). If you need to borrow more than 80%, some lenders will still approve the application, but you'll need to factor in the cost of LMI.

In our experience, people going through separation often have less equity to work with because assets are being divided or one party is buying out the other. If equity is limited, you may need to prioritise which debts to consolidate or explore whether releasing equity to clear all debts is realistic given your current property value.

When consolidating debt improves your position

Consolidating makes sense when the interest you're paying on other debts is significantly higher than your mortgage and when reducing your monthly commitment gives you the cashflow you need to manage day-to-day expenses. Consider someone who has $18,000 on a credit card at 19% and a $12,000 personal loan at 11%. The monthly repayments on those two debts might total around $900. By refinancing and adding $30,000 to a mortgage, the monthly repayment on that portion might be closer to $200, depending on the loan term. That's a reduction of $700 per month, which can make a material difference when you're covering rent, childcare, or legal fees.

It's also useful if you're about to enter a property settlement and want to present a cleaner financial position to your former partner or the Family Court. Consolidating debts into the mortgage means fewer ongoing liabilities, which can simplify the division of assets and reduce disputes over who's responsible for which debt.

What lenders assess before approving debt consolidation

Lenders will review your income, living expenses, and why you accumulated the debt in the first place. If the debt was used to fund lifestyle expenses and there's no clear plan to avoid repeating the pattern, some lenders will decline the application or only approve part of the consolidation. They'll also check your credit file to see if there have been missed payments or defaults. If your credit history shows consistent late payments, lenders may view you as higher risk and either decline the application or offer a higher interest rate.

During separation, it's common for one person to have taken on more debt to cover immediate costs while waiting for a property settlement. If you can explain the context and demonstrate that your income is stable, lenders are usually willing to proceed. They just want to see that consolidating the debt is part of a broader plan to stabilise your finances, not a temporary fix that delays the underlying issue.

How the refinance application is structured

You'll need to provide payslips, bank statements, and a list of all current debts including account numbers and balances. The lender will also arrange a property valuation to confirm the current market value of your home. If you're refinancing a property that's still jointly owned, both parties will need to consent to the refinance unless there's a court order or binding financial agreement that allows one person to act independently.

The lender will calculate your serviceability by adding the new loan amount to your living expenses and comparing that to your income. If the numbers show you can comfortably manage the repayments, the application moves forward. If it's tight, they may ask you to consolidate a smaller portion of the debt or increase your income by taking on additional work or adjusting your living arrangements.

Should you close the credit accounts after consolidation

Once the debts are paid out through the refinance, most lenders will ask you to close the credit card accounts or at least reduce the limits. This is because they've assessed your serviceability on the basis that those debts no longer exist. If you leave a $15,000 credit card open with a zero balance, the lender treats it as a potential liability because you could draw on it again at any time. Closing the accounts removes that risk and often results in a lower interest rate or higher approval amount.

If you need to keep one card for emergencies or business expenses, reduce the limit to the minimum you actually use. A $2,000 limit is far less concerning to a lender than a $15,000 limit, even if both have zero balances.

Refinancing to consolidate and accessing a lower rate

If you're refinancing to consolidate debt, it's worth reviewing whether your current interest rate is still appropriate. Many people going through separation are managing a mortgage that was set up years ago and haven't reassessed whether a lower interest rate is available. Refinancing gives you the opportunity to consolidate debt and reduce your ongoing interest cost at the same time, which can further reduce your monthly repayment.

If your current loan is on a fixed rate that's about to expire, the timing may work in your favour. You can roll the debt consolidation into the refinance and lock in a new rate that reflects current market conditions. If you're still within a fixed rate period, you'll need to weigh up the break costs against the benefit of consolidating the debt now versus waiting until the fixed term ends.

Managing debt after separation without refinancing

If refinancing isn't an option because you don't have enough equity or your income doesn't support a higher loan amount, there are other ways to manage debt during separation. You might negotiate a payment plan with creditors, apply for a personal consolidation loan outside the mortgage, or work with a financial counsellor to prioritise which debts to pay down first. Our article on managing debt after separation covers those strategies in more detail.

Refinancing to consolidate is one tool, but it's not the only one. If your situation doesn't fit the lending criteria right now, that doesn't mean it won't in six months once your income stabilises or the property settlement is finalised.

If you're weighing up whether consolidating debt into your mortgage makes sense given your current situation, call one of our team or book an appointment at a time that works for you. We'll review your debts, your equity position, and your income to work out what's realistic and what will genuinely reduce the pressure on your cashflow.

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