When several debts are taking a big bite out of your income, it can feel like your home’s equity is the obvious way out. Credit cards, personal loans, a tax debt, each with its own repayment and due date. One loan with no regular monthly repayments sounds like a relief.
It can ease cash flow, but it’s a big decision with real trade-offs. This guide explains how home equity release works for debt consolidation, what it can cost over time and the questions to ask before you decide.
How it works
A home equity release loan lets you borrow against the equity in your home without making regular monthly principal or interest repayments during the life of the loan. Funds may be used for one purpose or a combination of eligible needs, and that can include paying eligible credit cards, personal loans, tax debts or other liabilities.
Here’s the basic idea:
- You borrow against your property. You borrow an approved amount using the equity in your home.
- The funds clear your debts. The money goes towards paying off the eligible debts, so you no longer make their regular repayments.
- There are no regular repayments on the new loan. Simple interest accrues on the amount you borrowed and is added to the balance.
- You repay at a repayment event. There’s no fixed term. The loan is generally repaid when you sell, refinance or choose to repay, or when another repayment event in the contract occurs.
Why people consider it
- Cash flow relief: Several regular repayments are replaced by none on the new loan, which can free up income for everyday costs.
- One loan instead of many: There are fewer due dates to track.
- An option when income limits borrowing: It may suit people who are limited by traditional income-based borrowing requirements. Approval remains subject to eligibility, property requirements, credit assessment and responsible lending obligations.
The trade-offs to understand
ASIC’s MoneySmart warns that debt consolidation can make repayments easier to manage but may cost more, for example if the loan runs for longer, and that it can put the asset the debt is secured against at risk. With home equity release, these points matter even more:
Your unsecured debts become secured against your home. Credit cards and personal loans are usually unsecured. Once you pay them out with a loan against your property, the debt is secured by your home.
The balance grows over time. Having no monthly payments doesn’t mean no cost. Interest and other costs still accrue. The amount payable at the end may include the original loan amount, accumulated simple interest, lender fees and charges, and a deferral fee linked to an agreed share of any increase in your property’s value, where applicable.
A longer time can mean a higher total cost. MoneySmart gives the example of a debt moved to a lower rate over a longer term: the repayments drop, but the total cost could rise. Debts that you might have cleared within a few years can end up costing more if the new loan runs for ten or fifteen.
You’ll have less equity left. Using equity to clear debts reduces the equity you have in your home, which matters if you plan to sell soon or may want to borrow again.
It doesn’t fix what caused the debt. MoneySmart also notes that getting more credit can tempt you to spend more. If balances build up again on cleared credit cards, you can end up with both a growing loan against your home and new debt.
An illustration
Here’s a simplified example to show how time changes the picture. These figures are examples only, not a quote, a rate or an indication of what you’d pay.
Say you have $40,000 of debts: a $15,000 credit card and a $25,000 personal loan. Assuming a minimum card repayment of about 3% of the balance and the personal loan over five years at 12%, your regular repayments today are about $1,000 a month.
| Debts as they are | After consolidating | |
|---|---|---|
| Regular monthly repayments | About $1,000 | None on the new loan |
| What you owe over time | Goes down as you repay | Starts at $40,000, then grows |
With simple interest, interest each year is the amount borrowed multiplied by the interest rate. If your rate were 8% (an example only), that’s $3,200 a year on $40,000.
| After | Interest added at an example 8% | Balance before fees |
|---|---|---|
| 5 years | $16,000 | $56,000 |
| 10 years | $32,000 | $72,000 |
So the loan takes the pressure off your monthly budget, but the amount owing climbs the longer you hold it, and fees and any deferral fee would come on top. Whether that’s better or worse than keeping your debts depends on your actual rates, fees, how long you’d hold the loan and what you’d do with the money you free up each month.
Questions to ask before you decide
Ask for the answers in writing.
- What would I owe in total after five, ten and fifteen years, including all fees, compared with paying off my current debts?
- What is the interest rate, and how is the simple interest calculated?
- What fees and charges apply, and how is any deferral fee worked out?
- Which repayment events apply? What happens if I sell, or want to repay early?
- Can I make voluntary repayments to reduce the balance?
- What’s my plan to avoid rebuilding the debt? Closing or lowering the limit on cleared credit cards is one option.
- How could this affect my future borrowing, my estate and any government payments?
Other options to consider first
Depending on your debts and your budget, other options may be worth comparing:
- Refinancing or increasing a standard home loan, which comes with regular repayments but may cost less over time. See our guide to home equity release vs refinancing.
- A personal debt consolidation loan, or a balance transfer for credit card debt
- Talking to your lenders about hardship arrangements if you’re struggling with repayments
- Free financial counselling. The National Debt Helpline (1800 007 007) offers free, confidential help, and you can find out more at ndh.org.au.
MoneySmart’s guide to debt consolidation and refinancing explains what to check before you consolidate.
Common questions
Can I use home equity release to pay off credit cards? Funds may be used to pay eligible credit cards, personal loans, tax debts or other liabilities. Your broker can confirm what’s eligible for your situation.
Do I still have to repay the debts I consolidate? The funds are used to pay them out, so you stop making their regular repayments. The new loan is repaid when a repayment event occurs, and the amount owing will include interest and costs.
Is it cheaper than keeping my debts? It depends on your current rates, the fees, and how long you’d hold the loan. A broker can model the total cost of both over five, ten and fifteen years.
What if I sell my home in a few years? The loan is generally repaid when you sell, so the balance, including interest, fees and any deferral fee, would be paid from the sale proceeds.
Will it reduce the equity in my home? Yes. The amount borrowed is secured against your property, and the balance grows over time, which reduces the equity you have left.
Talk to an hfinance broker
The hfinance team can explain the costs and model your debts against a home equity release, so you can see the long-term impact clearly. Learn more on our home equity release page, read how it works in our first guide, or book a call to talk through your situation.
This article is general information only and does not take into account your personal financial situation or objectives. The figures in the illustration are examples only and are not a quote or an indication of the rates, fees or amounts you would receive. Equity release involves interest, fees and charges, and the amount owing grows over time and reduces the equity in your property. Approval is subject to eligibility, property requirements, credit assessment and responsible lending obligations. Speak with an hfinance broker, and consider independent financial and legal advice, before making any decision.