Reducing mortgage debt and consolidating loans

Many Australians carry a heavy debt burden that absorbs a large portion of their income. This article looks at strategies to better manage this debt burden and repayments to help repay debt faster and/or reduce the amount of interest paid over the term of the loan.

For many families, the greatest burden on finances is repaying debts, including mortgages on homes. Household debt comprises a large portion of expenditure and is generally not tax-deductible. It is not uncommon for home loan repayments to use at least 30–40% of a family’s disposable income. Credit card debt, in particular, is expensive debt and adds pressure to the family budget.

Once a debt is repaid, it also frees up disposable income. Therefore, a debt which is not eligible for tax deductions should be repaid as quickly as possible.

Making more frequent loan repayments to reduce debt

Interest payable on most forms of personal debt (such as mortgages and credit cards) is usually calculated on a daily basis so if repayments of the loan are made on a more regular basis, this can reduce the interest cost. You can potentially make savings on loans by:

  • paying interest more frequently to reduce interest costs – pay fortnightly rather than monthly, or
  • halving the monthly repayment and paying on a fortnightly basis as this can significantly reduce the repayment period. There are 12 months in a year, and 26 fortnights so this strategy effectively makes an extra month’s repayment each year.

Consolidating debt onto the home loan

Consolidating other debt such as personal loans or credit card debts into your mortgage may reduce your overall debt. However, it will all depend on how you manage the consolidation and your behaviour afterwards.  The overall debt will only be reduced if you have repaid more off your mortgage than the minimum amount and the additional repayments are enough to cover all of your other debts.

Alternatively, you will need to apply to your financial lender to increase the size of your mortgage. This will involve applying for a new loan and approval of the loan will be subject to your borrowing capacity.

Consolidating different types of debt into one loan may reduce the overall interest expense. For example, consolidating personal loans and credit card debts into a mortgage will generally reduce the interest payable as mortgages typically have a lower interest rate payable than personal loans and credit cards.

However, if you continue to spend and build up new debt on your credit card you will not reduce your overall debt and will not necessarily save any interest. You could consider cancelling the credit cards or lowering the credit limit to reduce the temptation to spend on the credit card.

Also, while consolidation of your personal loans or credit cards into your mortgage may reduce the interest rate payable on the debt and free up disposable income, it may extend the repayment period of the loan. This could result in you paying interest on the amount owing for a longer period and therefore paying more overall interest. If you don’t make additional repayments off your mortgage, you risk getting yourself into a situation whereby your mortgage debt becomes so high, you can no longer afford to make the repayments. This may result in you defaulting on your mortgage. Therefore, it is very important that you reduce your spending and pay extra towards your debt.

To ensure that you actually reduce the interest payable, you could increase your mortgage repayments by the amount that you would have been paying toward your personal loan or your credit card.

For Example

Tony has the following debts:

Loan balance 
Remaining term
Interest rate pa
Monthly minimum repayment
Home loan 
25 years  
Personal loan 
7 years

Tony pays a total of $1,803 per month in loan repayments. If he pays the personal loan off after 7 years and the home loan off over 25 years paying the minimum, he will pay $145,878 in interest.  He could consolidate his personal loan onto his home loan, with the $280,000 to be paid over the next 25 years. This reduces the interest on this debt to the lower home loan rate of 4% per annum.

Total monthly repayments reduce to only $1,478. But over the 25 year repayment period, the interest paid on the total debt of $280,000 equals $193,383 compared to only $145,878 if he kept the personal loan and mortgage separate.

If Tony consolidated the loans and made repayments of $1,800 per month instead of the minimum amount of $1,478, the entire debt of $280,000 would be paid off after 18 years and 4 months. The total interest paid on the entire debt would be $145,337 – saving Tony just under $50,000.

Warning: The example above assumes constant interest rates of 7% and 11% when calculating the figures. Actual interest rates may fluctuate over the term of the loan particularly for mortgages that are based on a variable interest rate. You will need to check the actual interest rates that apply to your circumstances.

Steps to consolidating debt

For further assistance, you may wish to find an online calculator which can help you to calculate the best way to reduce your debts. One suggested website is

Read our last blog on good and bad debt,

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Daniel Twentyman B.Bus.(Eco) Dip.F.S.(FP) Financial Planner – Authorised Representative