Debt Consolidation Case Study: A Real Melbourne Refinancing Example

Debt consolidation combines multiple debts, such as credit cards and a car loan, into a single home loan repayment, usually at a lower interest rate. In a real Melbourne case, a couple reduced their required monthly repayments from $5,944.47 to $3,564.06, a reduction of $2,380.41 a month, by refinancing and consolidating their debts.

The result was significant, but the strategy was not simply about finding the lowest rate or monthly repayment. The refinance costs, remaining loan term, loan structure and risk of turning short-term consumer debt into long-term mortgage debt all needed to be considered.

Names, addresses and other identifying details have been removed. The figures in this case study relate specifically to these clients, and outcomes will vary between borrowers.

The Result at a Glance

The key outcome was a reduction of $2,380.41 in the clients’ required monthly repayments, giving them more room in their household cash flow.

This should not be interpreted as a $28,565 annual saving. A lower required repayment does not automatically mean lower total interest over the life of a mortgage.

The Clients’ Situation

Before refinancing, the couple had four separate debts with different interest rates, repayments and due dates.

Managing four separate repayments was not necessarily the biggest problem. The more important issue was that a significant portion of the consumer debt was being charged at much higher rates than the mortgage.

They were managing four separate repayments, different interest rates and different due dates. Their goal was simple; reduce the pressure on their monthly cash flow and make their finances easier to manage.

What We Recommended (and Why It Wasn’t Just About the Lowest Repayment)

After reviewing the clients’ debts, repayments and overall position, we recommended refinancing their existing home loan to a new lender and using the refinance to pay out the two credit cards and car loan.

This left the clients with one home loan repayment rather than four separate repayments. However, we did not choose the structure simply because it produced a lower monthly figure.

Keep the Remaining Loan Term

We kept the remaining loan term broadly as it was rather than resetting the mortgage to a fresh 30-year term.

The consolidated debt therefore sat within roughly 28 years remaining, rather than being given an entirely new loan term. This was important because unnecessarily extending a mortgage can increase the total interest paid over time.

Keep the Loan Simple

The clients did not need an offset account, so a basic variable home loan with redraw was appropriate for their circumstances. This kept the structure straightforward while still allowing the clients to make additional repayments, subject to the lender’s terms and conditions.

A more complex loan is not necessarily a better loan if its additional features are not useful to the borrower.

Choose the Right Lender, Not Just the Lowest Rate

Not every lender treats debt consolidation in the same way. We needed a lender whose policy suited the clients’ circumstances, could accept the proposed consolidation and offered a competitive rate without unnecessary costs.

This is why comparing debt consolidation loans based solely on the lowest advertised interest rate can be misleading. The lender’s policy, loan features, costs and suitability for the borrower’s circumstances also matter.

Before and After: The Actual Numbers

The new loan amount was $580,000 because the refinance costs were incorporated into the new loan rather than being paid from the clients’ savings.

Why Did the Repayment Fall So Much?

The change in the home loan rate from 6.22% to 5.99% helped, but it was not the main reason for the lower required repayment.

The bigger difference came from moving the credit card debt at 22% and the car loan at 10% into the home loan at 5.99%, while replacing several separate repayments with one home loan repayment.

The longer repayment period also contributed to the lower required monthly repayment. That creates useful cash-flow relief, but it is also where an important debt consolidation risk arises.

The Important Trade-Off: Moving Short-Term Debt into a Mortgage

Debt consolidation can improve monthly cash flow, but it does not automatically reduce the total cost of borrowing.

Credit cards and car loans are generally designed to be repaid over shorter periods. A mortgage can run for decades. If a $20,000 car loan is consolidated into a mortgage and then repaid over the full remaining mortgage term, the lower interest rate does not necessarily mean less total interest.

That is the key trade-off.

The benefit in this case was the immediate reduction in required repayments and the substantially lower interest rate on the consolidated debts. The risk was allowing that improved cash flow to become an excuse to keep the additional debt for longer than necessary.

How We Managed That Risk

We did not restart the loan at 30 years

Keeping the remaining loan term helped avoid extending the mortgage simply to make the required repayment lower.

The loan remained flexible

The variable loan and redraw facility allowed the clients to make additional repayments when their circumstances allowed, subject to the lender’s terms and conditions.

The cash-flow relief can be used strategically

The reduction in required monthly repayments creates an opportunity to redirect some of the improved cash flow towards additional repayments.

Doing so could help reduce the consolidated debt faster rather than allowing the additional debt to remain in the mortgage for the full remaining term.

Avoid building the consumer debt back up

Consolidation only works as intended if the paid-out credit cards and other consumer debts are not simply accumulated again.

Clearing the original balances without changing the underlying borrowing behaviour can leave a borrower with both a larger mortgage and new consumer debt.

What Did the Refinance Cost?

The refinance cost approximately $1,230 in total.

This included:

• Lender settlement costs
• Government mortgage registration costs
• Payout and discharge costs from the previous lender

The new lender waived its valuation fee. Rather than paying the refinancing costs from their savings, the clients incorporated them into the new loan amount.

Refinancing should always be assessed on the complete numbers. A lower repayment is not necessarily worthwhile if the costs of switching outweigh the benefit.

Our home loan refinance service explains how we assess potential savings against the costs and structure of a refinance.

Who Might Debt Consolidation Suit?

Debt consolidation may be worth considering when you have sufficient equity in your property, higher-interest consumer debts and enough income to comfortably service the refinanced loan.

It can be particularly relevant when several debts are creating high monthly commitments or when the interest rates on those debts are significantly higher than the mortgage rate.

It may not suit you if you have insufficient equity, limited borrowing capacity or refinancing costs that outweigh the potential benefit. It may also be inappropriate if the strategy only works by substantially extending the mortgage term without a plan to repay the consolidated debt faster.

A home loan health check can also help identify whether your existing loan structure remains appropriate as your financial circumstances change.

Frequently Asked Questions