Are you struggling with high-interest debt from credit cards, lines of credit, or other loans? A debt consolidation mortgage might be the alternative mortgage solution that you’re looking for. By leveraging the equity in your home, you can consolidate high-interest debts into a single, manageable monthly payment, potentially saving money on interest and simplifying your financial life.
What is debt consolidation?
Debt consolidation refers to combining multiple debts into one new consolidated loan or account, typically with more favourable interest rates and terms. This allows you to simplify finances and save on interest costs compared to maintaining separate debts.
Several methods exist for consolidating debt, including:
- Personal loans
- Balance transfer cards: Transferring balances to a low-interest or 0% APR credit card
- Using home equity through a debt consolidation mortgage.
Each method offers different advantages and disadvantages depending on individual financial circumstances and the types of debt being consolidated.
For example, personal loans offer fixed interest rates and repayment terms. At the same time, balance transfer cards may provide an initial interest-free period but require vigilance to avoid accruing interest after the promotional period expires. Leveraging home equity offers access to larger loan amounts, but you will be at risk of losing your home if you default on payments.
How can debt be consolidated into a mortgage in Canada?
Consolidating debt into a mortgage means rolling high-interest, unsecured debts like credit cards or loans into a new or refinanced mortgage. Borrowers can save money each month to get out of debt faster and also tap into their home equity to pay off debts all at once.
Here’s an overview of how a debt consolidation mortgage works:
- Borrow funds – Through a refinance or renewal, you borrow extra funds above your current mortgage balance, tapping into your available home equity.
- Pay off debts – The lender sends the additional borrowed funds directly to your creditors to pay off balances.
- Consolidate into one payment – After your debts are settled, you are left with a higher mortgage balance but just a single payment.
- Enjoy lower interest – Your new mortgage interest rate should be lower than the rates paid on credit cards or other unsecured debts.
- Pay over time – You repay the consolidated amount as part of your regular mortgage payments over a set repayment term.
Eligibility depends on your income, credit history, financial stability, and home equity.
Mortgage options for debt consolidation
There are 4 different mortgage products homeowners can use to consolidate debt:
Consolidate Debt into a New Mortgage
For first-time home buyers or those without an existing mortgage, you may be able to consolidate debts directly into your new mortgage loan. This allows you to pay off other debts when you purchase the home.
Cash-Out Refinance
This involves refinancing your existing mortgage for a higher amount to get cash proceeds to pay off debts. You cash out some of your home equity and roll debts into a new first mortgage.
Home Equity Line of Credit (HELOC)
A HELOC works like a credit card tied to your home’s value. You can draw from your available credit limit to pay off debts, paying interest only on what you use.
Second Mortgage
Also known as a piggyback mortgage, a second mortgage uses your home as collateral, and the funds are used to consolidate other debts.
What Types of Debts Can You Consolidate?
Common high-interest debts that can be consolidated into a mortgage through refinancing include:
- Credit card balances – The most commonly consolidated debts, moving card balances to a mortgage can significantly reduce interest costs.
- Lines of credit – Outstanding balances on personal lines of credit and overdraft accounts can be paid off through consolidation.
- Payday loans – Payday loans with very high interest rates are prime consolidation candidates.
- Auto loans – Any remaining balances can be added to a consolidation mortgage.
- Student loans – Government and private student loan debt is usually eligible for consolidation.
- Second mortgages – You may be able to combine a second mortgage into your primary mortgage.
The key is choosing debts with higher interest rates than you expect to receive on your consolidation mortgage. This maximizes potential savings.
Pros of Debt Consolidation Mortgages
Like any major financial move, taking out a consolidation mortgage has advantages and potential drawbacks. Consider these key pros:
- Lower interest rate – The top benefit is replacing high-interest debt with a lower mortgage rate, reducing costs.
- Single payment – Consolidation simplifies finances with one predictable monthly payment versus multiple debts.
- Improved cash flow – Lower interest and a single payment can free up monthly cash flow.
- Fixed repayment schedule – Mortgages have a set monthly payment and term for predictability.
Cons of Debt Consolidation Mortgages
Consolidating your debt into your mortgage also brings 4 drawbacks:
- Higher mortgage amount – Your total mortgage debt will increase, which adds risk.
- Reduced home equity – Equity is reduced by the amount borrowed for consolidation.
- Risk of more debt – Some borrowers add more high-interest debt and negate the benefits.
- Longer amortization – Repayment could take longer than the original debt.
Assess your situation carefully to determine if the pros outweigh the cons.
What is the Process to Get a Debt Consolidation Mortgage?
If you decide to move forward with a consolidation mortgage, follow these eight key steps:
- Review your budget and debts – Compile details on all debts and your current income and expenses. This helps determine affordability.
- Check your home equity – Confirm that you have at least 15-20% equity to borrow against for consolidation.
- Compare mortgage offers – Apply and collect mortgage quotes from multiple lenders. Compare key terms like rate, fees, and prepayment options.
- Apply for a new mortgage – Complete the application, submit documents, and get approval from a lender.
- Use the funds wisely – Once the mortgage is funded, you will make new consolidated monthly payments. If you have debts paid directly through a lawyer, then use the funds responsibly.
Be sure to account for all costs in your budget, including appraisal and legal fees.
Alternatives to Debt Consolidation Mortgages
Using a mortgage for debt consolidation has clear benefits but also downsides. Here are a few alternative debt relief options to consider:
- Credit counselling – Non-profit credit counselling provides guidance on improving payment behaviour and negotiating with creditors.
- Debt management plan – Credit counsellors can facilitate a structured payment plan with consolidated payments.
- Debt consolidation loan – Banks and lenders offer consolidation loans, which allow you to combine debts without using your home equity.
- Sell assets – Selling valuable assets like cars, property, or valuables can provide funds to pay off debts.
Compare all options and run the numbers to see which method may provide the most financial benefit or peace of mind.
FAQs on Debt Consolidation Mortgages
Is it better to consolidate debt before or after getting a mortgage?
It's generally better to consolidate first while you still have the option, as lenders don't like you taking on more debt after closing on a mortgage.
Can I get a debt consolidation mortgage with bad credit?
While challenging, qualifying for a consolidation mortgage is possible even with less-than-perfect credit, especially if you have a sizable down payment or equity.
When should you avoid a debt consolidation mortgage?
Consolidation may be too risky if you have limited equity, poor credit, an unstable financial situation, or concerns about affording a higher mortgage payment
Where can I get a debt consolidation mortgage in Canada?
Major banks, credit unions, and mortgage brokers all offer debt consolidation mortgage products. Shop rates from multiple Canadian lenders to find the best option.
What debts cannot be consolidated into a mortgage?
In Canada, most government student loans, child support, alimony, and taxes cannot be consolidated into a mortgage.
Can I consolidate student loans into my mortgage?
Most government student loans cannot be consolidated into a mortgage in Canada. Private student loans from a bank may be consolidated if you meet eligibility criteria.
Is debt consolidation with a mortgage a good idea?
It can be if you get a low mortgage rate and need to lower payments. But carefully consider the risks and your ability to repay the borrowed amount.
Key Takeaways on Debt Consolidation Mortgages in Canada
- Debt consolidation mortgages allow homeowners to pay off high-interest debts like credit cards at lower mortgage rates through refinancing.
- Key benefits include lower interest costs, simplified finances, improved cash flow, and fixed repayment terms.
- Downsides include increased total mortgage debt, reduced home equity, and longer payoff periods.
- Homeowners with sufficient equity who struggle with high monthly payments are prime candidates for consolidation.
- Work with reputable lenders and follow proper mortgage procedures to tap into your home equity for consolidation successfully.
- Depending on your circumstances, alternatives like debt management planning, consolidation loans, and HELOCs may be better options.
With proper research and planning, a debt consolidation mortgage can effectively streamline Canadian homeowners’ finances by reducing interest costs on credit cards and other high-rate debt. Assess your individual situation carefully to decide if consolidation is the right debt relief strategy for you.