Which debts can be consolidated into a home loan?

Credit and store cards are paid out and usually closed as a condition of the loan, which also improves serviceability because lenders assess cards at 3 to 4 per cent of the limit each month. Personal loans and car loans are paid out with a payout letter from the lender. Buy now pay later accounts are treated like small personal loans. Overdrafts and lines of credit can be included. Each debt needs a current statement and a payout figure, and the lender pays the creditor directly at settlement.

ATO debts are accepted for consolidation by non-bank and specialist lenders, and by some banks where the debt is small and lodgements are current. Business debts in the borrower's own name, such as a sole trader's overdraft or a director's personal guarantee that has been called, can be included at lenders that accept business purpose consolidation. Company debts generally cannot be consolidated into a personal home loan unless the director borrows and on-lends to the company.

Some majors limit consolidation to a set number of debts, for example four, or a set amount, for example $50,000 to $100,000 of unsecured debt, or require that consolidation is not the main purpose of the refinance. Debts in arrears or default are declined by majors and accepted by specialists. Debts owed to family members are accepted by some lenders with a loan agreement and declined by others. Above 80 per cent LVR, consolidation is heavily restricted.

The new lender pays each creditor from the loan proceeds and requires evidence the accounts are closed, particularly cards. The borrower cannot take the cash and promise to pay the debts. Any surplus above the payouts is either released to the borrower as cash out, subject to the cash out rules, or not lent at all.