Mortgage debt consolidation: using home equity to pull debts together

How does mortgage debt consolidation work?

If you own a home with equity, a lender may let you borrow against it to clear other debts. The new borrowing pays out your credit cards, personal loans, store cards or tax debt, and from then on you service a single secured loan. Equity is the gap between what the property is worth and what you owe on it.

There are three common ways to do it:

• Refinance and cash out. Replace your home loan with a larger one and use the difference to clear debts. See cash-out refinance.
• Top-up or equity release. Increase your existing loan, if your lender allows it. See home equity loans.
• Second mortgage. Leave the first loan in place and add a second loan behind it. See second mortgages.

What are the benefits?

• One repayment replaces many
• Short-term debts that carry heavy minimum payments can be cleared
• Cash flow may improve straight away
• Arrears and collection pressure can ease
• In some cases the overall cost can fall, though it must be checked

What does MoneySmart warn about?

MoneySmart’s guidance on consolidation highlights several points that apply strongly here:

• A longer term lowers repayments but can raise the total cost significantly
• Turning unsecured debt into secured debt means the lender may sell your asset if you cannot repay
• Fees and the new rate must be compared against what you are paying now
• Freed-up credit can encourage new spending

Put simply, a home loan is a very long, very big container. Debts that would have been cleared in a few years can end up costing interest for decades unless you make extra repayments.

Refinance, top-up or second mortgage?

Feature	Refinance and cash out	Top-up	Second mortgage
Existing home loan	Replaced	Increased	Left in place
Term	Often long	Often long	Often shorter
Lenders	Banks and non-banks	Your current lender	Specialist and private lenders
Credit file flexibility	Narrower	Narrower	Often wider
Cost profile	Priced on circumstances	Priced on circumstances	Priced on circumstances
Best for	Cleaner credit, stable income	Small to medium needs	Declined elsewhere, bigger or urgent needs

Our guide on refinance versus second mortgage goes into more detail, and secured debt consolidation loans covers the private-lending end.

What do lenders look at?

• The property: value, location and type
• How much is owing on it and the resulting LVR (see what is LVR)
• Your income and living costs
• The debts being cleared and their conduct
• Credit history and recent enquiries
• The exit or repayment plan

How does Ownright approach mortgage debt consolidation?

Consolidating against a home is a serious step, so we start with the full picture rather than a product. Ownright Custom Finance asks about the debts, the property and what you want to be different in twelve months. Then we compare routes and lay the trade-offs out plainly, including the option of doing less or not at all.

Where a bank has said no, we look further. Trevor Scott has spent more than 40 years in finance and the team works Australia-wide from Knoxfield, Victoria, finding structures that some brokers do not know exist, including private first and second mortgages. If tax debt is part of the problem, see home loans when you owe the ATO. Timing depends on the lender, the security and how quickly documents come in. When you are ready, tell us about your property and debts.

An illustration

Illustrative scenario only. A homeowner has two credit cards, a personal loan and an overdue utility account. The mortgage is with a lender that will not release more equity. A broker might compare a refinance elsewhere with a second mortgage, factor in the exit costs of each, and suggest a plan for repaying the new debt faster than its term to limit total cost.

Mistakes to avoid

• Consolidating then running the cards up again
• Choosing the longest term and never making extra repayments
• Ignoring exit fees on the existing mortgage
• Not checking whether the debts could be paid down another way
• Skipping free financial counselling if you are in serious hardship

Documents to have ready

• Photo ID
• Mortgage and debt statements
• Rates notice and title details
• Payslips, tax returns or business financials
• Bank statements

Our checklist on what documents you need for a loan has more.

How much equity can you use?

Lenders generally limit borrowing to a portion of the property’s value, which is the LVR. Equity available for consolidation is the gap between that limit and what you currently owe. A valuation or desktop estimate is normally part of the process, and the result depends on the lender and the property. Unusual or rural properties can be assessed differently. We never quote caps, but we can tell you what looks realistic once we have the address and loan details.

What about the interest and the term?

Interest on a home loan is priced on your circumstances and the loan structure, and the term is usually long. That is what makes repayments lower. It is also why total cost can rise sharply if you do nothing else. Making extra repayments, or splitting the new borrowing into a separate loan with a shorter term, are ways some borrowers keep the cost in check. A broker can show you how the repayment plan changes the outcome.

Does consolidation suit investors and business owners?

It can, though the lender will want to understand the purpose and the structure. Business owners often consolidate business and personal debts together, sometimes including ATO balances, and investors may use equity across several properties. The paperwork is heavier, and the right lender depends on your income type. See self-employed home loans and refinancing ATO debt for related detail.

What if the bank says no?

A decline from a bank is not the end. Different lenders weigh arrears, self-employment, credit history and property type in different ways, and some focus mainly on the property and the plan. Our guide on what to do if your loan is declined explains the usual steps, and difficult home loans shows where we can help. Free financial counselling is also worth a call if you are under pressure.

Ready to pull your debts together?

Sounds like you are looking for mortgage debt consolidation that works with your home equity. We’re the lending experts in consolidating debts against property, so click the button below and see if you qualify.