Should You Roll Your Car Loan Into Your Mortgage? A Real-Numbers Case Study

A question I get a lot from clients carrying a mortgage and a car loan at the same time: "Should I just combine these into one debt when I refinance?"

It's a reasonable instinct - one repayment instead of two, and a much lower interest rate on the car debt. But the honest answer is: it depends entirely on what you do with the freed-up cash flow. Done well, consolidating puts you years ahead. Done on autopilot, it quietly costs you tens of thousands.

Here's a worked example using a scenario I see all the time in Perth, run out over 1, 2, 5 and 10 years so you can see exactly where the trade-offs bite.

The starting position

• Home loan: $600,000 owing, 25 years remaining, 6.00% p.a. - minimum repayment $3,866/month

• Car loan: $50,000 owing, $1,100/month, 5 years remaining (roughly 11.5% p.a.)

• Combined repayments today: $4,966/month

The plan on the table: refinance to pay out the car loan, draw an extra $50,000 for renovations, and roll it all into a new $700,000 home loan at 6.00% over 25 years.

What changes immediately

Because the car loan was being crushed into 5 years at a high rate, spreading that debt over 25 years at 6% lowers the required repayment more than the extra $50k renovation draw adds back:

	Minimum monthly repayment
Current mortgage + car loan	$4,966
New $700k consolidated loan	$4,510
Monthly cash flow improvement	+$456 - even after the $50k reno draw

That's the immediate, undeniable benefit: more breathing room, plus $50,000 of renovations funded. What happens next depends on whether that breathing room gets put to work - and this is where the same decision splits into two completely different financial futures.

The fork in the road

Compare three paths over the next decade. Path one: don't consolidate at all. Path two: consolidate and pay only the new minimum. Path three: consolidate and redirect $800 of the old $1,100 car payment into the mortgage (still pocketing $300/month).

Total debt remaining	Keep loans separate	Consolidate, minimum only	Consolidate + $800/mo extra
After 1 year	$631,464	$687,540	$677,671
After 2 years	$611,317	$674,311	$653,965
After 5 years	$539,593	$629,525	$573,709
After 10 years	$458,112	$534,464	$403,360

Remember the two consolidation paths also funded $50,000 of renovations - so they're carrying extra borrowing the "keep separate" path never took on.

The ten-year verdict

Over the life of the loans	Time to debt-free	Total interest paid
Keep loans separate	25 years	$575,713
Consolidate, minimum only	25 years	$653,033 - $77,320 MORE
Consolidate + $800/mo extra	18 years - 7 years early	$445,832 - $129,881 LESS

⚠ The whole story in one sentence

Consolidating and paying the minimum converts a 5-year car debt into a 25-year one and costs $77,000 extra. Consolidating and redirecting most of the old car payment wipes 7 years and $130,000 of interest off the mortgage - and funds the renovations - while still leaving $300/month of extra breathing room. Same refinance, opposite outcomes.

What this means for you

Debt consolidation is neither good nor bad - it's a tool, and like any tool the result depends on the plan behind it. Before rolling short-term debts into your home loan, the questions worth answering are: What will the freed-up cash flow actually do? Is there a repayment strategy in writing? And does the new structure (offset, redraw, split) support that strategy?

That modelling is exactly what I do with clients before any refinance - your numbers, your loans, run out over the timeframes that matter, so the decision is made with eyes open.

Thinking about consolidating?

- I'll tell you honestly whether it stacks up for your situation, including when the answer is "don't".

Figures are illustrative only, based on the stated rates and terms held constant, and do not account for fees, rate changes or your personal circumstances. This article is general information only and does not consider your objectives, financial situation or needs. Ian Freeman - Credit Representative Number 439731 of Australian Credit Licence 384704.