The Pros and Cons of Rolling Personal Loans into Your Mortgage

Personal loans serve various purposes in New Zealand—financing vehicles, consolidating smaller debts, funding home improvements, or covering unexpected expenses. While personal loans offer faster access to funds than refinancing, they typically carry significantly higher interest rates than mortgages. This creates an opportunity for homeowners: refinancing to roll personal loans into your mortgage can reduce interest costs and simplify debt management. However, this strategy isn't always the best choice, and understanding both the advantages and disadvantages helps you make informed decisions about your debt.

This comprehensive guide examines what personal loans are and why people have them, explains how rolling them into your mortgage works, analyzes the financial benefits and potential savings, explores the risks and disadvantages you must consider, helps you determine whether consolidation makes sense for your situation, and provides strategies for successful personal loan consolidation through refinancing.

Understanding Personal Loans in the New Zealand Context

Personal loans fill gaps that credit cards and mortgages don't cover, providing medium-term financing for specific purposes.

What Personal Loans Are Used For

Personal loans in New Zealand commonly fund vehicle purchases when buyers don't want or can't obtain dedicated car loans, consolidate smaller credit card or store card debts into single loans, finance home improvements or renovations when homeowners prefer not to refinance, cover significant one-time expenses like weddings or medical costs, or provide emergency funds when savings are insufficient.

Unlike credit cards with revolving credit, personal loans provide fixed amounts repaid over set terms, typically one to seven years. Unlike mortgages, they're unsecured—not backed by property—which allows faster approval but results in higher interest rates reflecting increased lender risk.

Typical Personal Loan Terms and Rates

Personal loan interest rates in New Zealand generally range from eight to fifteen percent, depending on the lender, loan amount, borrower creditworthiness, and whether the loan is secured against an asset. Secured personal loans, often used for vehicles, charge lower rates than unsecured loans but still significantly exceed mortgage rates.

Loan terms typically span two to seven years, with three to five years being most common. Monthly payments combine principal and interest, calculated to fully repay the loan over the agreed term. Unlike mortgages where you might have flexibility around extra payments, some personal loans charge early repayment penalties, though many don't.

Why Personal Loan Interest Rates Are Higher

Personal loans charge higher interest than mortgages for several reasons. They're unsecured, meaning lenders can't seize specific assets if you default, increasing their risk. They're shorter-term loans where lenders must recover costs and profits more quickly. Administrative costs as a percentage of loan amount are higher for smaller personal loans than large mortgages. And personal loans often serve borrowers who don't qualify for lower-cost alternatives, reflecting higher perceived risk.

Understanding why personal loans cost more helps you appreciate the savings potential from refinancing to mortgage debt.

How Rolling Personal Loans into Your Mortgage Works

The consolidation process is straightforward conceptually, though it requires careful execution.

The Basic Mechanics

When you refinance to consolidate personal loans, you increase your mortgage by the amount needed to pay off your personal loans completely. Your lender advances this increased amount, from which your lawyer or you directly pay out the personal loans in full, discharging them entirely.

You're left with only your mortgage, albeit at a higher balance than before. Your personal loans disappear, and you make just one monthly payment toward your consolidated mortgage. The personal loan debt hasn't disappeared—it's been converted from high-interest unsecured debt to lower-interest secured debt against your home.

Lender Assessment Process

Lenders assess consolidation applications carefully. They verify the existence and amounts of personal loans you're consolidating, evaluate whether you can service the increased mortgage amount, consider that personal loan payments will disappear from your obligations once consolidated, and assess whether consolidation genuinely improves your financial position and reduces your default risk.

Lenders generally view personal loan consolidation favorably because it reduces your total interest burden and simplifies your financial obligations, making you a lower-risk borrower overall. However, they still must confirm you can comfortably afford the increased mortgage.

What Information You Need

To refinance for personal loan consolidation, gather current statements for all personal loans showing exact balances, lenders, and account details. Calculate the total amount needed to pay them off completely. Ensure you have sufficient equity in your property to consolidate while maintaining acceptable loan-to-value ratios.

Prepare explanations for why you took the personal loans—lenders want to understand whether they funded legitimate purposes or concerning spending patterns. Be honest and forthcoming, as lenders will verify information through credit checks anyway.

The Financial Benefits of Consolidation

Understanding the quantitative benefits helps you evaluate whether consolidation makes financial sense after accounting for costs.

Substantial Interest Rate Reductions

The primary benefit is converting debt from personal loan rates of eight to fifteen percent down to mortgage rates of around six percent. This reduction of two to nine percentage points dramatically decreases your interest costs.

For example, twenty thousand dollars in personal loans at twelve percent costs two thousand four hundred dollars annually in interest. That same twenty thousand as part of your mortgage at six percent costs just one thousand two hundred dollars annually—a saving of one thousand two hundred dollars every year. Over five years, this single consolidation saves six thousand dollars in interest charges.

Multiply these savings across multiple personal loans or larger balances, and consolidation can save tens of thousands of dollars over the life of your debts.

Reduced Monthly Payment Obligations

Personal loans typically have higher monthly payments due to their shorter terms and higher rates. Consolidating into your longer-term mortgage substantially reduces the monthly payment burden.

If you're paying five hundred dollars monthly toward personal loans and consolidate twenty thousand dollars into your mortgage, your mortgage payment might increase by only one hundred and twenty dollars monthly depending on your remaining term. This frees up approximately three hundred and eighty dollars in monthly cash flow—substantial relief for strained budgets.

However, remember that while monthly payments decrease, total interest paid can increase if you extend repayment over your full mortgage term rather than the original personal loan terms. This is why maintaining higher payments after consolidation is important.

Simplified Financial Management

Multiple personal loans mean multiple payment dates, amounts, and lenders to track. Missing payments triggers late fees and credit score impacts. Managing several debts creates stress and administrative burden.

Consolidating everything into your mortgage creates one payment, one lender, and one interest rate to manage. This simplification reduces errors, eliminates the risk of missed payments across multiple accounts, and makes budgeting and financial planning more straightforward.

Improved Credit Score Potential

Paying off personal loans in full immediately improves your credit file by showing closed accounts with zero balances, reducing your total credit utilization, and demonstrating responsible debt management. Within months, your credit score typically improves, opening doors to better terms on future borrowing.

However, this benefit only materializes if you don't accumulate new personal loans or other debt after consolidating, which would quickly reverse any credit score improvements.

Tax Considerations for Investment Loans

While personal loans for consumer purposes offer no tax advantages, if you used personal loans for investment purposes like purchasing rental property equipment or funding business activities, the interest might have been tax-deductible.

When you consolidate into your mortgage, separating investment-related debt and maintaining clear documentation helps preserve potential tax deductibility. Consult accountants about proper structuring to maximize tax efficiency when consolidating investment-related personal loans.

The Risks and Disadvantages of Consolidation

Balancing benefits against risks helps you make well-rounded decisions about whether to consolidate.

Converting Unsecured to Secured Debt

Personal loans are typically unsecured, meaning if you default, lenders can't immediately seize assets. They might obtain judgments and pursue collection actions, but the process takes time and doesn't automatically threaten your housing security.

When you consolidate personal loans into your mortgage, you convert this unsecured debt to secured debt backed by your home. If you default on your mortgage, your lender can ultimately force sale of your home to recover their money. You're therefore putting your most important asset—your housing—at risk for debts that previously didn't directly threaten it.

This substantially raises the stakes if your financial situation deteriorates. Consider whether the interest savings justify this increased risk to your home security.

Dramatically Extended Repayment Timeframes

Personal loans typically have three to seven year terms, meaning they're designed to be fully repaid relatively quickly. When you consolidate into a mortgage with twenty or twenty-five years remaining, you're stretching debt repayment over a far longer period.

While this reduces monthly payments, it dramatically increases total interest paid if you only make minimum payments. Ten thousand dollars on a five-year personal loan at eleven percent costs approximately three thousand dollars in interest. That same ten thousand consolidated into a twenty-five year mortgage at six percent costs approximately nine thousand five hundred dollars in interest—more than triple despite the lower rate, purely because of the extended timeframe.

This is why maintaining or increasing your payment amounts after consolidating is critical. If you continue paying what you were paying before consolidation, you eliminate the debt much faster and minimize total interest costs.

Refinancing Costs Can Offset Savings

Rolling personal loans into your mortgage requires refinancing, which incurs costs including application fees, legal fees, valuation costs, and potentially break fees if exiting a fixed mortgage term early.

If you're consolidating relatively small personal loan balances, these costs might eliminate much or all of your interest savings, particularly over shorter timeframes. Always calculate whether your savings over realistic periods exceed your refinancing costs.

For example, consolidating eight thousand dollars in personal loans might save you eighty dollars monthly. If refinancing costs three thousand five hundred dollars, your break-even point is approximately forty-four months. If you plan to sell within three years, you'll barely break even or potentially lose money on the consolidation despite the interest rate improvement.

Reduced Equity and Financial Flexibility

Consolidating personal loans into your mortgage reduces your available home equity, limiting your financial flexibility for future needs. If unexpected opportunities or emergencies arise requiring equity access, you have less available equity than before consolidating.

Additionally, increased mortgage debt reduces your borrowing capacity for other purposes, potentially limiting options if your circumstances change.

Temptation to Accumulate New Debt

Perhaps the most serious risk is that clearing personal loans creates capacity to take new personal loans, leading to a cycle where you consolidate, then re-accumulate loans, then consolidate again, continuously increasing your mortgage while never escaping debt.

Statistics suggest significant percentages of people who consolidate personal loans eventually take new personal loans within a few years. Unless you address the underlying reasons you needed personal loans initially, consolidation provides only temporary relief before problems resurface.

Who Should Consider Personal Loan Consolidation

Not everyone benefits equally from rolling personal loans into mortgages. Certain profiles indicate consolidation likely makes sense.

Ideal Candidates for Consolidation

You're probably a good candidate if you have substantial personal loan debt with high interest rates costing you significant monthly interest charges, sufficient home equity to consolidate while maintaining healthy loan-to-value ratios, and stable income that comfortably services your increased mortgage.

Ideal candidates also have clear, legitimate reasons for the personal loans that aren't indicative of problematic spending patterns, genuine commitment to avoiding new personal loans after consolidating, and realistic plans to maintain higher payment levels after consolidation to minimize total interest over time.

If you check these boxes and consolidation offers clear financial benefits after accounting for refinancing costs, it's likely a smart strategy.

Who Should Avoid Consolidation

Conversely, avoid consolidation if your personal loans resulted from uncontrolled spending or financial mismanagement without genuine commitment to behavior change. If you have insufficient equity to consolidate without risky high LVRs, or if you can't comfortably afford the increased mortgage payment, consolidation isn't appropriate.

Also avoid consolidation if you're planning to sell your property soon and won't benefit long enough to justify costs, if your personal loan balances are small and refinancing costs exceed realistic savings, or if you have near-term plans to take additional personal loans undermining the purpose of consolidation.

Be honest about whether you fit the ideal candidate profile or whether consolidation might create more problems than it solves.

Special Situations and Considerations

Certain personal loan situations require extra thought before consolidating.

Vehicle Loans and Secured Personal Loans

Some personal loans are secured against vehicles or other assets. When you consolidate these into your mortgage, you're shifting the security from the vehicle to your home. This changes the risk profile—you're now putting your home at risk for vehicle debt.

Consider whether this shift makes sense. If the vehicle loan has reasonable rates already because it's secured, consolidation might not offer sufficient benefit to justify the increased risk to your home. However, if the vehicle loan carries high rates despite being secured, consolidation can still provide meaningful savings.

Investment-Related Personal Loans

If you took personal loans for investment purposes like purchasing tools or equipment for business, funding investment property repairs, or other income-producing activities, the interest might have been tax-deductible.

When consolidating into your mortgage, work with accountants to structure the debt appropriately. You might want to split your mortgage to clearly separate investment-related debt from personal debt, maintaining the tax advantages of the investment portion while consolidating for interest rate benefits.

Personal Loans from Family or Friends

If some of your personal loans are informal borrowings from family or friends, consider carefully whether to include these in consolidation. While rolling them into your mortgage formalizes repayment and applies consistent interest rates across all debt, it also shifts these obligations from personal relationship debt to secured bank debt.

Discuss with your family members or friends before consolidating debts owed to them. They might prefer to maintain existing arrangements, or they might appreciate being repaid through your refinancing.

Recent Personal Loans

If you took personal loans very recently—within the last six months—lenders might question why you need to refinance already rather than planning better initially. This doesn't prevent consolidation, but be prepared to explain your reasoning.

Recent personal loans also mean you haven't benefited from them long enough to have paid much principal, so you're essentially converting the full loan amount to mortgage debt. Ensure this makes financial sense rather than consolidating prematurely.

Strategies for Successful Personal Loan Consolidation

If you decide consolidation is right for you, these strategies maximize benefits and minimize risks.

Calculate True Costs and Benefits

Before applying to refinance, calculate precisely your current total personal loan interest costs annually, your interest costs after consolidating at mortgage rates, your total refinancing costs, and your break-even point where savings exceed costs.

Also calculate total interest paid under various scenarios including making only minimum mortgage payments, maintaining your current payment level after consolidating, and making extra payments beyond your previous payment level.

This comprehensive analysis ensures you understand the full financial picture rather than just focusing on monthly payment reductions.

Plan to Maintain or Increase Payments

Commit to maintaining the total payment level you were making toward personal loans even after consolidating. If you were paying six hundred dollars monthly toward loans and your mortgage increases by only one hundred and fifty dollars, continue paying the full six hundred with four hundred and fifty going to extra principal payments.

This discipline ensures you eliminate the consolidated debt within a few years rather than carrying it for decades, minimizing total interest costs and quickly reducing your mortgage balance.

Avoid Taking New Personal Loans

After consolidating, commit to avoiding new personal loans except for genuine emergencies. If you need to make purchases, save first rather than borrowing. Build emergency funds so unexpected expenses don't force you back into personal loan debt.

Consider closing any personal loan facilities or credit lines you have available to remove temptation and prevent easy access to new debt.

Address Underlying Financial Issues

If your personal loans resulted from budget shortfalls, overspending, or lack of emergency savings, address these root causes. Create and stick to a realistic budget, build emergency savings to at least three months of expenses, identify and modify spending patterns that led to needing loans, and develop financial management skills through education or counseling.

Consolidation treats symptoms but doesn't cure underlying financial behavior problems. Long-term success requires addressing why you needed personal loans initially.

Monitor Progress and Celebrate Milestones

Track your consolidated debt reduction actively. Calculate when you'll have fully repaid the consolidated amount and celebrate milestone achievements like repaying twenty-five percent, fifty percent, and ultimately one hundred percent.

Recognizing progress keeps you motivated and accountable rather than letting consolidated debt simply blend into your overall mortgage without conscious attention to eliminating it.

Document Everything Clearly

Keep clear records of which portion of your mortgage represents consolidated personal loans, original loan purposes and amounts, and your repayment plan for this portion. This documentation helps you track progress and may be relevant for tax purposes if any loans had investment purposes.

Clear documentation also reminds you that this portion of your mortgage is relatively new debt that deserves focused repayment attention rather than being treated as ordinary mortgage debt to be carried indefinitely.

Alternatives to Consider

Before consolidating through refinancing, consider whether alternative strategies might suit your situation better.

Aggressive Personal Loan Repayment

Rather than refinancing, you might eliminate personal loans through aggressive repayment using debt avalanche or snowball methods. Focus extra funds on your highest-interest personal loan while making minimums on others, then roll that payment to the next loan once the first is eliminated.

This approach avoids refinancing costs and maintains your equity position, though it typically takes longer than consolidation unless you can make very aggressive payments.

Personal Loan Refinancing

Some lenders offer personal loan refinancing or consolidation at lower rates than your current loans, potentially improving your situation without involving your mortgage. While rates won't be as low as mortgage rates, you avoid refinancing your entire mortgage and the associated costs.

Investigate whether personal loan consolidation products offer sufficient benefit before committing to full mortgage refinancing.

Balance Transfer Options

For smaller personal loan amounts, sometimes balance transfer credit cards with promotional low or zero percent rates can temporarily reduce interest while you aggressively pay down balances. If you can eliminate debt within the promotional period, you might save interest without refinancing.

However, promotional rates are temporary, and if you don't eliminate debt before rates revert, you're potentially worse off than before.

Professional Guidance for Personal Loan Consolidation

Given the complexity and long-term implications, professional advice helps ensure optimal decisions.

At Luminate Financial Group, we help New Zealand homeowners evaluate personal loan consolidation by calculating realistic savings after all refinancing costs, assessing whether you have sufficient equity and income for successful consolidation, structuring refinancing to maximize benefits while minimizing risks, and providing honest feedback about whether consolidation suits your specific circumstances or whether alternatives might work better.

We also help you develop repayment strategies that minimize total interest costs and connect you with financial counseling resources if addressing underlying financial management issues is essential for long-term success.

Our goal isn't maximizing refinancing volume but ensuring personal loan consolidation genuinely improves your financial position. Sometimes that means recommending you delay consolidation, pursue alternative strategies, or address behavioral issues before using refinancing as a tool.

Considering rolling personal loans into your mortgage? Contact Luminate Financial Group for comprehensive analysis. We'll calculate your true costs and benefits, evaluate whether consolidation makes sense for your situation, and guide you toward the best strategy for your financial future.