<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=375088249364044&amp;ev=PageView&amp;noscript=1">

The Bottom Line on Consolidating Debt Into Your Mortgage

by:
Doris Asiedu

As a credit counsellor, you get asked all the time whether or not someone should consolidate high-interest debt into their mortgage.

The thought is that in doing so, it will reduce the overall interest being paid on the debt (because the mortgage rate should be lower, in theory) and free up potentially hundreds of dollars every month. It’s a win-win, right? Not so fast. Sometimes, consolidating debt into a mortgage can cost you. But first, let’s take a look at just how it works.

Consolidating Debt Into Mortgage: How it Works

Consolidating debt into a mortgage means breaking your current mortgage and rolling high-interest credit cards, car loans, and other non-mortgage debt into a new mortgage at a new (hopefully) lower interest rate, overall.

Now, your mortgage debt increases by the amount of non-mortgage debt you rolled into it, plus a couple of thousand dollars more for the cost of breaking the old mortgage, plus a potential Canada Mortgage and Housing Corporation (CMHC) premium on the increased balance on the mortgage. What's the upside? The interest rate you pay on your non-mortgage debt decreases. But there's a caveat: you're paying it off over a longer period of time, so you won't be debt-free any time sooner.

It's Complicated

Figuring out whether or not consolidating your non-mortgage debt into your mortgage will benefit you in the long-run depends on many (many) factors. Every mortgage is unique, and there are just too many variables to provide a black and white answer—it's all grey!

For example, some people will have to consider whether or not they can even qualify for a new mortgage depending on the new rules around mortgages today. You also have to consider the new mortgage rate you can get on the renewal; will it be more or less than your current rate? If it's more, does the decrease in interest that you'll pay on your non-mortgage debt outweigh the increase? There's also the cost of the penalty for breaking the mortgage, plus the new CMHC premium, potentially, as well as any legal fees involved. In some cases, your property might need to be assessed, and that will also cost you.

These are all things you'll need to consider to really know if consolidating your non-mortgage debt into your mortgage is the best choice for you, and they are very big variables. If you want to know what consolidating your debt into your mortgage will really look like for you, you might want to consider speaking to your bank. 

The Downside of Consolidating Debt Into Mortgage

While there can be many benefits to consolidating your debt into your mortgage—in some cases, you could save a couple hundred dollars a month over the course of your mortgage; you can use our Debt Calculator to get a rough idea and compare different scenarios—but you should only consider this if you really need to.

The risk is that too many people can start to see their home as a resource that they can tap into if they were to ever lose their job, need to cover a medical emergency, or help fund their child’s education. But it’s not an unlimited resource. If you use up your equity to pay off your non-mortgage debts, you may not have any left when you really need it.

Another trap is that many people will continue to use their credit cards after consolidating their debt into their mortgage. So now, not only will they be paying a higher monthly payment on the mortgage, but also be back in the hole with creditors, too. (This is a definite sign that a refresher on some money management and budgeting skills wouldn't hurt, and there are a ton of budgeting tips and tools here.)

Of course, there’s also no guarantee a person will qualify to consolidate their non-mortgage debt into their mortgage.

If you’re trying to get the maximum loan amount, which is typically 80-85% of the value of the home, you’ll likely need a credit score of 700 or better. If you plan to borrow less than that, the credit requirements are less stringent—fairly similar to buying a home. Too much credit card debt can also sink the loan. In some cases, it’s possible to qualify if you agree to pay off your credit cards and close the accounts; however, closing the accounts can put a dent in your credit score.

Debt Consolidation Programs: Another Option

If you’re hesitant to use up some of your home equity to pay off your debts, you may want to consider a Debt Consolidation Program (DCP).

A DCP involves rolling all of your debt into one monthly payment through a credit counselling agency (they should be non-profit). A certified credit counsellor will then negotiate with your creditors, on your behalf, to lower your monthly payment and reduce or stop the interest on your debt.

The best part is that you don't need good credit to qualify for a DCP. All you would need to focus on is making your new lower monthly payment every month on time and in full. Then after completing the program, you'll get steps on how to rebuild your credit and manage your money. It's win-win across the board and a great alternative to consolidating debt into your mortgage.

If you're looking for some free expert advice on what might be the best option specifically for you given your situation, give us a call at 1.800.267.2272 and we'll hook you up with a free counselling session with one of our certified counsellors. You'll get all the info you need to make the best decision for you.

Free Debt Assesment

Topics: Debt Consolidation, Housing

Print This Article

Leave a Comment