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High-interest debt – such as credit cards and personal loans – can be challenging to manage and pay down. The high-interest charged on loans makes it very hard just to pay the interest portion of the debt, let alone the principal. That said, there are ways to tackle these types of debt. If you own a home and have a certain amount of home equity built up in it, consider a debt consolidation mortgage. It may help you better manage your debt.

Can You Consolidate Debt Into A Mortgage In Canada?

If you own a home, you can use your home equity to consolidate your debt. By refinancing your existing home loan with a debt consolidation mortgage, you can pay off some of your higher-interest debt, especially credit cards, which can come with rates as high as 20% or more. With such interest rates, the outstanding balance can easily mount month after month if only minimum payments are made.

What Is A Debt Consolidation Mortgage?

A debt consolidation mortgage essentially involves taking out a new loan to pay off other high-interest debts. This basically means that several sources of debt are combined into one larger debt, typically at a much lower interest rate.

How To Consolidate Your Debt Into Your Mortgage

There are a few ways to consolidate your debt into your mortgage, including the following.

Consolidate Your Debt Using A Mortgage Refinance 

A mortgage refinance involves paying off your existing mortgage and replacing it with a new one. By refinancing your mortgage, you’ll change either the interest rate, the term, or both. Doing so can lower your monthly payments or help you save on interest. 

By refinancing your mortgage, you may be able to free up extra funds that you can use to pay off other debts. However, breaking your home loan before the term ends means you may be subject to an early repayment penalty fee. As such, it’s important to crunch the numbers to make sure a mortgage refinance makes financial sense. 

Consolidate Your Debt Using A Second Mortgage

A second mortgage is a lien placed on a property that already has a mortgage on it. The original mortgage that’s still in effect is known as the ‘first’ mortgage. Hence, a ‘second’ mortgage is second in line in terms of priority. 

The first mortgage will be repaid first before any other mortgages that come after it, including a second mortgage. Given this, there’s more risk for the second mortgage lender, as the second mortgage will not be repaid until the first is paid off. As such, second mortgages typically come with higher interest rates compared to first mortgages. 

You can take out a second mortgage to access the equity in your home, then use the extra funds to pay off all other debts. There are two main ways you can borrow using the equity in your home: a home equity loan and a home equity line of credit (HELOC).

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Home Equity Loan

A home equity loan involves borrowing a lump sum of money against the equity in your home. You can access up to 80% of the value of your home, less the outstanding balance you currently carry. Like an installment loan, you’re required to pay the home equity loan in installments over a certain period of time ( 5 to 30 years). 

While home equity loans may have higher rates than first mortgages, the rates may be lower than what you’re currently paying on other debts, including credit cards and unsecured personal loans. Paired with the long term, consolidating your debts with a home equity loan can streamline your debt payments and make them more affordable. 

Where Can You Get A Home Equity Loan?

There are many lenders that allow you to tap into your home equity such as Alpine Credits. They allow homeowners to access their home equity regardless of their age, income or credit history. That means, even if you have bad credit, you can still get the funds you need to consolidate your debts into one low-interest payment. 

A Home Equity Line of Credit (HELOC) 

A HELOC is a line of credit secured by your house. HELOCs typically come with variable mortgage rates that may be a bit lower than a typical 5-year fixed mortgage rate.

Unlike a home equity loan, you don’t get a lump sum of money with a HELOC. Instead, you’re given access to a specific amount of equity in your home, which you can use for a variety of purposes, including consolidating your debt. 

You can withdraw as much or as little as you like, as long as it does not exceed the credit limit. There’s no need to pay a portion of the principal every month. 

The minimum monthly payment is interest-only and is calculated based on how much you’ve withdrawn. You’re only charged interest on the withdrawal amount, and not on the entire credit limit. Once the funds are fully repaid, interest is no longer charged until you draw again in the future. 

How Much Can You Save In Interest By Consolidating Your Debt Into A Mortgage?

The amount of interest paid on a $10,000 debt at 6% is a lot less than at 20%. With a debt consolidation mortgage, you could be saving a great deal of money every month by paying a much lower rate on the same debt amount, helping you pay it off much faster.

Personal LoanCredit CardDebt Consolidation Mortgage
Loan Amount$10,000$5,000$15,000
Interest Rate15%19.99%6%
Term24 months33 months*36 months
Monthly Payment$346.65$200*$456.33
Total Interest Paid$2,479.4$1,521.02$1,427.88
Total Paid $12,479.4$6,521.02$16,427.88
* the following numbers are based on the assumption you make fixed monthly payments of $200

As seen in the example above, by using a debt consolidation mortgage to combine the two high-interest debts, you could save approximately $2,572 in interest. Moreover, rather than making two payments, you can make one smaller payment with the debt consolidation mortgage. 

Do You Qualify For A Debt Consolidation Mortgage?

Each lender has their own specific lending criteria, so you’ll need to find out what’s needed and compare it to your financial and credit profile to see if you can qualify for a debt consolidation mortgage. 

However, in general, banks and credit unions typically have the most stringent lending criteria compared to alternative lenders. As such, depending on who you apply with, the requirements to qualify for a debt consolidation mortgage will vary. 

That said, there are some common factors lenders may evaluate to determine whether you are creditworthy, such as your:

  • Credit Score – Do you have good credit (660+)? 
  • Income Level – Do you have an income level high enough to cover your debt payments?
  • Debt-To-Income Ratio (DTI) – Lenders may have certain DTI limits, some as low as 36%. 

Benefits Of A Debt Consolidation Mortgage

Consolidating your debts into your mortgage, particularly high-interest debts, can provide a number of benefits, including the following:

Save Money And Pay Off Your Debt Sooner

Consolidating your debt into your mortgage can help you better budget your finances and come up with a payment plan that will help you pay down your debt sooner rather than later. 

In addition, consolidating your debt into your mortgage also allows you to take advantage of a lower interest rate, making your debt more affordable and easier to pay off.

Debt Payments Are Easier To Manage With A Debt Consolidation Mortgage

By consolidating all of your debt into a loan or line of credit, you’ll be afforded the benefit of only having to manage one consolidated payment instead of having to handle many different bills from various creditors.  

A Debt Consolidation Mortgage Can Help You Improve Your Credit Scores

One of the biggest perks of consolidating your debt is that it can help you improve your credit scores. By reducing your loan payments and consolidating all your debts into one, easily-managed bill, it’ll be easier for you to cover your loan payments on time each billing cycle. 

With each timely payment, you’ll build a positive payment history which may improve your credit score. And with better credit scores, you may have easier access to various financial products.  

Drawbacks Of A Debt Consolidation Mortgage

The ability to consolidate your high-interest debts into one bill with a lower rate is a huge advantage of consolidating your debt into your mortgage. But there are also a few drawbacks to consider as well before applying:

  • You may add more debt to the pile. If you’re not disciplined, you may accumulate more debt even after getting a debt consolidation loan, especially if you continue to spend on credit. If you do, not only will you be paying more against your home loan, but you’ll have a higher credit card bill to contend with. If you continue along this path, you could wind up in a worse debt position than you were in when you first consolidated your debt into your mortgage. 
  • You’ll be in debt longer. Rolling all of your debts into your home loan essentially means you’ll be paying them down for a longer period of time. 
  • You risk drying up your home equity. If you’re not careful, you could use up so much of your home’s equity that there may eventually be nothing left to tap into. Using your home equity to cover non-essential expenses repeatedly could put you at risk of running out of equity at some point. 

What To Consider When Getting A Debt Consolidation Mortgage?

Before you consolidate your debt into a mortgage, there are a few important considerations to make first, including the following:

Your Ability To Qualify

As mentioned earlier, there are several requirements that you may have to meet in order to be eligible for a debt consolidation loan. Find out what the lender’s criteria are and make sure you meet them before applying. 

Associated Fees

If you choose to refinance your mortgage to access funds to consolidate your debt, you may be charged a penalty fee for breaking your mortgage early, which can be hefty. There may also be other administrative fees that you’ll be subject to. Calculate all the fees you may have to pay to be sure debt consolidation makes sense in your situation. 

Interest Rate

One of the main goals of consolidating your debt is to secure a lower interest rate compared to the rates you’re currently paying. A lower rate on a debt consolidation loan can help you save a ton of money over the long haul. But if the rate is the same or only slightly lower, the potential fees you pay may cancel out any benefits. 

Consolidating Debt Into First Time Mortgage

Current homeowners aren’t the only ones who are able to take advantage of debt consolidation using their mortgages. First-time buyers can also tap into the benefits that debt consolidation has to offer by rolling their debts into a new mortgage.

In order to qualify for such an arrangement, your loan-to-value (LTV) ratio needs to be under a certain amount. Your LTV basically represents the size of your loan in comparison to your home’s value. Lenders rely heavily on this ratio in order to better understand the risk level of a specific loan. If the number is too high, the odds of mortgage denial are also high. Generally speaking, lenders don’t typically approve borrowers if their LTV is more than 80% on a new home loan.

Debt Consolidation Mortgage FAQs

What types of debt can you consolidate into your mortgage?

You can consolidate a variety of debts into your mortgage, including car loans, student loans, credit card debt, and personal lines of credit.

How do I consolidate debts into a mortgage?

Reach out to a mortgage broker, who will review your financial situation and determine if you’re eligible for a refinance. If you are, your broker will help you find a lender who can offer you the lowest rate and best terms based on your financial and credit profile.  Apply for the loan and provide the lender with all the required documents. If approved, you’ll get access to the funds needed to pay off all other debts you’re carrying. You’ll then be left with one loan to manage instead of many.

Do I qualify for a debt consolidation mortgage?

To determine whether you qualify for a debt consolidation loan, your lender will look at your credit score, income, debts, and home equity.  

Can I get a debt consolidation mortgage with bad credit?

Without good credit, it will be challenging – if not impossible – to get approved with a bank. However, you may have better luck with an alternative lender if you have bad credit. Similarly, some lenders may not be as strict with their lending requirements if you’re applying for a home equity line of credit (HELOC) as a means of accessing funds to consolidate your debt. That’s because HELOCs often require only interest payments to be made each month. This lowers your monthly payments and reduces the risk for the lender. Plus, you’re using your home as collateral. However, a bad credit score will typically mean a higher interest rate on your new loan.

Final Thoughts

If you’re considering consolidating your debt through your mortgage, be sure to crunch the numbers, take a hard look at your finances and your borrowing behaviour, and speak with a professional mortgage specialist who’s well-versed in the realm of consolidating debt into mortgages. Done right, it could help you save plenty of money in the long run.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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