It is important to know that if you’re considering debt consolidation there is a right way and wrong way to go about it.

A good option is to ask your mortgage broker or lender to synchronise but retain the consolidated debt as a ‘split’ separate to your original home loan. You’ll be paying the same interest rate on each split, but via separate repayments.

This is a great way of reminding debt consolidating refinancers that their debt did not just disappear into the abyss, to help prevent them from falling into the trap of racking up more debt now that their slate has been wiped clean.

Many borrowers just continue to pay the minimum due on the mortgage and then run up a new debt on their credit card, and within twelve months they’re right back where they started, but with a much bulkier home loan by their side.

“Consolidating debt as a separate split is a reminder of how vulnerable you are to letting credit get the better of you. It also helps you see how quickly you are or are not fixing the problem,” says Michael Lee, founder of KeyFacts.

“Also, even though refinancing will probably reduce your minimum monthly required payment, you should aim to keep your payments at current levels to make sure you are actually taking advantage of the lower interest rate.”

Here is an example of the right and wrong ways to refinance to consolidate your debt.


Jennifer has a home loan of $400,000, with monthly repayments of $2,000. Her home is worth $600,000. Jennifer also has several personal debts that she is struggling to repay each month:


Debt: Amount due: Monthly repayment:
Mastercard $6,000 $550
Car loan $11,500 $425
Store card $2,500 $225
Sub total  $24,000  $1,520
Home loan  $400,000  $2,000
TOTAL $424,000 $3,520

The right way to refinance Jennifer’s debts:

Obtain a new loan for $424,000 and split her new mortgage into two facilities;

  1. One loan of $400,000 – she maintains repayments of $3,520 per month on the original loan
  2. One loan of $24,000 – she makes the minimum repayment = $200 per month. Make repayments of $1,000 in addition per month to quickly reduce the debt. Put the extra $500 per month into a savings account, or use towards livings expenses
The wrong way to refinance Jennifer’s debts:

Obtain a new loan for $424,000 – Repay the new minimum payment due of $3,520 per month. Spend/save the additional repayments she no longer has to fork out each month on minimum balances, and watch her credit card balances rise again.