If credit cards, lines of credit and other high-interest balances are taking a large share of your income every month, a debt consolidation mortgage can turn several payments into one and reduce the interest you pay. It uses the equity you have already built in your home to pay off the expensive debt.
This page explains how consolidation against home equity works, when it makes sense, and when it does not.
How a debt consolidation mortgage works
- We estimate your home’s value and how much equity is available after your current mortgage.
- A lender advances funds against that equity, usually as a second mortgage registered behind your first.
- The proceeds are used to pay off the balances you have chosen to consolidate.
- You make one payment on the new mortgage instead of several payments on cards and credit lines.
Why the math can work
Credit card interest commonly runs from about 19 to 29 percent. A secured mortgage costs more than a bank mortgage, but its interest rate is typically far below credit card rates, and the payment is often calculated on interest only. That can free up monthly cash flow quickly. What it does not do is reduce the principal, so you need a plan to repay or refinance the new mortgage when the term ends.
Use the Debt Consolidation Calculator to compare your current monthly interest with the consolidated payment. Enter your total debt and the average rate you are paying, and it shows the estimated savings and the total mortgage amount, fees included.
When consolidation makes sense
- Your balances carry high interest and you have equity in your home
- Your income is steady enough to keep up the new payment
- You have a plan to avoid running the cards back up
- You can see a route to a bank mortgage or a sale when the term ends
When it does not
Consolidation is not a cure for a spending problem, and it converts unsecured debt into debt secured by your home. If the equity would be used up entirely, or a lower-cost option such as a bank refinance, a debt management program or a consumer proposal fits better, we will say so. The right answer is the one that still works twelve months from now.
What lenders look at
The key number is combined loan-to-value: your existing mortgage plus the new one, measured against the value of the property. Lower combined loan-to-value generally means better pricing and easier approval. Lenders also consider the property type and location, the payment history on your current mortgage, and your exit plan.
If you were turned down by a bank first, see Declined by a Bank or A Lender. To understand the loan structure itself, read about second mortgages.
Frequently asked questions
Will debt consolidation hurt my credit score?+
Paying off revolving balances can lower your credit utilization, which often helps scores over time. The new loan is secured by your home, though, so missed payments on it carry serious consequences. Credit reporting practices vary by lender.
Can I consolidate debt with bad credit?+
Often yes. Private lenders weigh the equity in the property more heavily than the credit score, although pricing and the maximum loan-to-value can be affected by credit.
Is the monthly payment lower?+
Frequently, especially when the new mortgage is interest-only. An interest-only payment does not reduce the principal, so you will need to repay or refinance the mortgage at the end of the term.
Does it have to be a second mortgage?+
Not always. If you have equity and can qualify with a bank, refinancing your first mortgage can cost less. A second mortgage is typically used when a bank says no or when you want to keep a low-rate first mortgage in place.
What fees should I expect?+
Typically a lender fee, a broker fee, legal fees and an appraisal. These are usually paid from the mortgage proceeds, so the total mortgage is slightly larger than the debt being paid off. The calculator shows an estimate.
NOW Mortgage is a RECA-licensed brokerage operating under Dependable Mortgage Solutions Corp. Call 587-200-6727 or email lending@nowmtg.ca. Information on this page is general in nature and is not a commitment to lend. Financing is subject to lender approval, property assessment and final documentation. OAC.