Refinancing to Consolidate Debt: When It Helps and When It Hurts

How it works

You increase your home loan by the amount of your other debts, and the lender pays those debts off directly. Five repayments become one. Because home loan rates are usually far lower than credit card or personal loan rates, the monthly cost drops, often by a lot.

The trap

A personal loan runs for maybe five years. A mortgage runs for 25 or 30. Move $30,000 of short-term debt onto the mortgage and repay it at mortgage pace, and you can pay more interest in total than you would have at the higher rate, simply because you're paying it for so long.

The second trap is behavioural. The credit cards are back at zero and the temptation is obvious. A fair number of people who consolidate end up with the bigger mortgage and the card debt again within a couple of years. We're blunt about that with clients because it's the thing that decides whether consolidation was a good idea.

Doing it properly

• Put the consolidated amount in its own loan split with a short term, say three to five years. You still get the lower rate, but the debt is gone on roughly the original timetable.
• Or keep your total repayments the same as before. The money that used to go to the car loan now attacks the mortgage.
• Close or cut the limits on the cards you've cleared. Lenders count card limits against your borrowing power anyway, so it helps future applications too.

What lenders look at

A lender will check that you have the equity, generally keeping the total loan within 80% of your home's value, and that you can afford the new loan. They'll also read your statements. Missed payments, unarranged overdrafts or buy-now-pay-later debt piling up make banks cautious, and some will decline even where consolidation would obviously improve your position.

If a bank says no, a non-bank lender may still help, at a higher rate, as a stepping stone back to a bank once things are tidy. And if you're already behind on payments, talk to your lender about hardship options or to a free budgeting service such as MoneyTalks before borrowing more.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.