People sometimes refinance a home loan to consolidate debt because mortgage interest rates are usually much lower than the interest rates on other types of borrowing, such as credit cards or personal loans.

When you refinance, you may be able to increase the size of your home loan slightly and use the extra funds to pay off other debts. Those debts are then rolled into the mortgage, leaving you with a single repayment instead of several different ones.

For example, if you have:

• $20,000 on a credit card at around 18 – 20% interest, and
• $15,000 in a personal loan at around 10 – 12% interest,

you might refinance your mortgage and add $35,000 to the loan balance to pay off those debts. Because home loan interest rates are typically much lower than credit card or personal loan rates, the overall interest cost and monthly repayments can be reduced.

Another reason people consolidate debt through refinancing is simplicity. Instead of managing several different repayments each month, you have one mortgage repayment.

However, there are some important considerations. Because a mortgage usually runs over a long period, such as 20–30 years, moving short-term debt into a home loan can mean paying interest on that debt for much longer. For this reason, consolidating debt through refinancing works best when the borrower is confident they will avoid building up new high-interest debts again.

In practice, borrowers usually refinance to consolidate debt when they have significant credit card balances, personal loans, or other high-interest debts that are becoming difficult to manage. A lower mortgage rate and a single repayment can make the situation easier to control while reducing interest costs.