How to Consolidate Debt Into Your Mortgage
Published on 3 Jan 2023
Let's face it, no one likes high-interest debt. Luckily, debt consolidation offers a way out of these high-interest loans for those who aren't able to pay them off with one lump sum.
In this blog, we dive into how homeowners can benefit from rolling their high-interest debt into their mortgage to cut costs significantly.
Keep scrolling to learn about:
- What debt consolidation is and why you need it
- How to consolidate debt with your mortgage
- The benefits of debt consolidation
- The steps to consolidate debt
- Other debt consolidation options
Let's get started!
What is Debt Consolidation and Why do you Need it?
Debt consolidation combines two or more loans into a single larger loan. So, why do this?
Typically there are two main reasons that you may want to consider debt consolidation:
- Lower high-interest credit debt
Debt consolidation allows you to reduce high-interest credit debt (like a credit card of 19.99%) by rolling it into a lower-interest rate loan/product.
- Simplified debt payments
When you have multiple sources of credit, it can be difficult to keep track of all of your payments when they have different amounts due on different days. Debt consolidation allows you to roll all of these sources of credit into one easy payment.
How to Consolidate Debt with a Mortgage
If you're looking to consolidate debt, there are plenty of options available to you––one of the most common being moving your credit card debt and other high-interest loans into a secured line of credit. However, if for some reason, the above is not a valid option for you, you also have the ability to use your home.
If you already own your home, then you may be able to consolidate your high-interest debt into your mortgage if you have built up enough equity in your home to do so.
So, how does this work?
To consolidate debt with a mortgage, you will need to refinance your current mortgage, take out the equity you have built up, and then use it to pay back the loans/debt that you wish to consolidate.
It’s important to note that there is a limit to the amount of funds you can access from your mortgage. The maximum amount you can access is 80% of the appraised value of your home minus the balance remaining on your mortgage.
Benefits of Debt Consolidation
Now that you know what debt consolidation is and how it works, let's take a look at the benefits that it can provide.
Lowers interest rates for all your debts: Lower interest rates mean lower monthly payments. Who doesn't want that?
Frees up cash flow: The lower monthly payments brought on from debt consolidation will help free up your cash flow.
Improved credit score: Debt consolidation allows you to pay off loans faster, which benefits your overall credit score.
Simplified payments: When you have multiple loans/debts, keeping track of all the payments can be difficult. Debt consolidation makes payments easier by rolling them into a single payment.
Saves you money: Less money spent on interest = more money in your pocket.
Can help you pay off your mortgage faster: The extra money you are saving via debt consolidation can be put towards lump sum payments to pay off your mortgage’s principal.
Steps to Consolidate Debt into Your Mortgage
Here we’ll go through the four-step process you’ll have to follow if you decide to consolidate debt into your mortgage.
Step 1 - Determine how much equity you have and how much mortgage you qualify for.
To determine the equity you have in your home you need to know what your home's current value is. This is done by getting it appraised, which will likely cost between $350-$500.
Once the appraisal is completed, you can go ahead and calculate the total equity. To do this you will need to take a look at your most recent mortgage statement to determine how much is still owing, then subtract the remaining amount from 80% of the home's appraised value.
For instance, if the value is $1,000,000, and your mortgage is $400,000, the equity in your home is $400,000. You can increase your mortgage up to $800,000 if you can qualify for it, and then take out a lump sum to pay back your high-interest loans.
Step 2 - Determine the total amount of debt you can pay off.
The next step is determining what portion of your debt you can pay off with a refinanced mortgage. Most often, the goal is to pay off all of your debt, however, you may only be able to consolidate a portion of it depending on the amount of equity you have built up in the home.
Step 3 - Determine if you need to break the mortgage contract.
When refinancing your mortgage to consolidate debt you will be required to pay a fee to break your mortgage unless you refinance at the time your mortgage comes up for maturity or if you have an open mortgage.
If mortgage penalties do apply, it's best to work with a mortgage broker—they will be able to identify whether or not the fees incurred will offset the savings you would earn from debt consolidation.
Step 4 - Determine if you will qualify.
Refinancing requires you to requalify for the mortgage at the new, higher amount.
When determining if you qualify for consolidating debt into your mortgage, the lender will factor in the following:
- Appraised value of your home
- Debt-to-income ratios
- Credit score rating
- The condition of the property
When you work with a mortgage broker, they will be able to match you up with a lender that you qualify with and is best suited for your needs.
Alternative Debt Consolidation Options
Not everyone can qualify or is interested in refinancing their mortgage to consolidate debt. If that's the case for you, not to worry, there are some other options available.
HELOC or ELV
Similar to a standard line of credit, a home equity line of credit (HELOC) or equity line visa (ELV) are revolving interest-only loans. The way they differ is that HELOCs and ELVs are secured to your property.
In Canada, there are limits to the amount of funds you can access with a HELOC or ELV:
- You can access up to 65% of your home's appraised value.
- Your outstanding mortgage balance + your HELOC/ELV cannot equal more than 80% of your home's value.
With this option, you get the benefit of only having to make payments on the amount you use. However, just like your mortgage, because your home is used to secure the debt, if you miss a payment or default you would be putting your home at risk.
Home Equity Loan
Like a cash-out refinance, a home equity loan will create a new mortgage. However, they use the equity as collateral instead of the home itself.
Home equity loans generally have higher interest rates than a refinance or HELOC. Another way this type of loan differs from HELOCs is that they are paid out as a lump sum and come with a fixed interest rate.
For those having difficulty qualifying for debt consolidation through the options we've mentioned already, a second mortgage through a private lender may be a good alternative. These types of loans are based on the value of your home, not your income or debt.
With a second mortgage through a private lender, the interest rates will be higher than a typical mortgage. Even so, they will still be able to provide savings as their interest rates are often lower than that of credit cards and other high-interest debts.
Debt Consolidation with Pineapple
When it comes to big financial decisions like whether or not to consolidate debt, you always want to lean on the advice of an expert. At Pineapple, our experienced brokers will perform a full needs assessment to determine if debt consolidation is the right move for you and, if so, match you with a lender that is best suited for you based on your needs and finances.
Give us a call today to explore debt consolidation options.
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