As Credit Counsellors, we’re often asked, “Can I consolidate my debt into a mortgage?” The thought is that in doing so, you will reduce the overall interest you have to pay on your individual debts (because the mortgage rate should be lower) 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
Most homes have equity in them. Equity is the difference between the value of the home and what is owed on the mortgage. So, say your home is worth $200K and you only owe $125K on the mortgage. That means you have $75K worth of equity. Even better, as you continue to pay down your mortgage, equity continues to go up (a spike in property value also increases it, while a drop in property value, of course, decreases it). That $75K is a nice chunk of change, right? So in this case, you might consider using it to pay down some of your high-interest debts by consolidating them into your mortgage.
Consolidating debt into a mortgage means breaking your current mortgage agreement and rolling high-interest debts, such as credit card debt, payday loans, and other non-mortgage debt, into a new mortgage set at a new (hopefully) lower interest rate, overall.
Once you’ve done this, your mortgage debt will increase 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. The upside is that, in theory, the interest you pay on your non-mortgage debt decreases.
Factors to Consider When Consolidating Debt into Mortgage
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 debts outweigh the increase in the mortgage interest you'll end up paying?
There's also the cost of the penalty for breaking your current mortgage, the potential new CMHC premium, as well as any legal fees involved. In some cases, your property might need to be assessed, and that will cost you, too.
These are all things you'll need to think about to really know if consolidating credit card debt and other debt into your mortgage is the best choice for you. If you want to know what consolidating your debt into your mortgage will really look like for you specifically, you might want to consider speaking with your bank or credit union.
Consolidating Debt Into a First-Time Mortgage
Not a current homeowner but thinking about buying a home? You may be able to consolidate your unsecured debt into your first-time mortgage. To be eligible, lenders will look at your loan-to-value (LTV) ratio to determine the risk you pose as a borrower. LTV is the size of your loan compared to the value of the home you intend to buy.
So, if your LTV is under a certain amount (typically 80% or less) your lender may allow you to roll high-interest debts into your lower-interest home loan. This can be a great way to get out from under high-interest debts, but it does have its downsides.
The Downsides of Consolidating Debt Into Mortgage
There can be many benefits to consolidating your unsecured, high-interest debts into your mortgage – in some cases, you could save a couple hundred dollars a month over the life of your mortgage! But it also has it's downsides, such as:
1. You will be in debt longer
By rolling other debts into your mortgage, you’ll be paying them off over a longer period of time, so you won't be debt-free any sooner.
2. You may run out of equity
Some people begin seeing their home as a resource they can tap into whenever they need it, even for frivolous things like a vacation. And in some cases they’ll start treating their home like an ATM. But equity is not an unlimited resource. If you use up your equity, you may not have any left when you really need it, such as during a job loss or medical emergency.
3. You may rack up more debt
Many people continue to use their credit cards after consolidating their balances into their mortgage. So now, not only are they paying more on their mortgage, but they’ll also be back in the hole with credit card lenders.
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 could potentially lower your credit score.
Of course, there’s also no guarantee you'll qualify to consolidate non-mortgage debt into your mortgage. If you’re wondering, “How much can I borrow against my home,” every lender is different and every borrower is different. It typically depends on the value of the home, how much debt you're looking to consolidate into your mortgage, how much equity you have in the home, and your credit score.
Other Debt Consolidation & Debt Help Options
If you’re hesitant to use up some of your home equity to pay off your debts, that’s understandable. Fortunately, there are a number of other debt consolidation and debt help options you may want to consider. Our debt consolidation calculator can give you a rough idea of how long it will take you to pay off your unsecured debts at their current interest rates using different repayment strategies. The calculator also provides different debt relief options that may be available to you, rather than consolidating your debt into your mortgage.
Home Equity Line of Credit (HELOC)
Similar to a home equity loan, but instead of getting a lump sum a HELOC is a revolving line of credit (similar to a credit card). That means you have access to a certain amount of money that you can use as needed, only paying interest on what you borrow. The downside is that interest rates are variable, meaning they could go up, and as with a home equity loan, undisciplined spenders may tap out their home equity.
Debt Consolidation Loan
If you’re not keen on borrowing against your home, you may be able to get a debt consolidation loan through a bank, credit union, or finance company. A debt consolidation loan can be used to pay off unsecured debts, leaving you with only one monthly payment to a single lender, hopefully at a lower interest rate. But to obtain a debt consolidation loan you must have good credit, collateral, or a co-signer with good credit. In some cases, a stable source of income is needed as well. As with home equity loans and HELOCs, some people can run into trouble if they continue to use their credit cards, while also owing to the debt consolidation loan lender.
Budget Planning and Expense Tracking
Okay, this isn’t a debt consolidation option, but we’d be remiss not to include it! Often, rather than continuing to borrow, people can get a handle on their debt by practicing better money management skills. This includes budgeting and watching how you spend your money. You can do this online with our free, downloadable Budget Planner + Expense Tracker – it’s easy to use and the instructions are included in the spreadsheet.
Get Debt Relief Today
If home refinancing and the other options mentioned here don’t interest you, or you think poor credit will hold you back, a Debt Consolidation Program is another great debt relief option. A Debt Consolidation Program involves rolling all of your unsecured debt into one monthly payment through a credit counselling agency (they should be a non-profit organization). 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 Debt Consolidation Program. All you 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. (You can hear from some of our clients here!)
If you're looking for some free expert advice on what might be the best debt relief option specifically for you given your financial 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 Credit Counsellors. You'll get all the information you need to make the best decision for you!