Mortgage Refinance to Consolidate Debt – It’s Your Money
Debt management with ever-increasing interest rates can seem like a daunting task.
Monthly debt payments can take up a lot of your income, and it may feel like it will take you forever to pay off the amount you owe.
For example, if you have a balance on your credit cards, you could typically pay 19.99% interest. If you owed $5,000 on a card like this, the annual interest would be $999. If you only pay $150 on your credit card each month, only about $67 will be used to pay off the amount you owe. It would take you over four years to pay it off in full, and you’d end up paying $2,357 in interest.
Likewise, personal loans, lines of credit, payday loans, and car loans can all have escalating interest charges and add financial stress. Juggling so much debt and paying so much interest can make financial progress difficult.
Household debt levels, while already very high in Canada, are skyrocketing this year and the 300 basis point increase we’ve seen in the Bank of Canada prime rate (so far this year ) makes each month harder than the last. This is why many homeowners are considering a debt consolidation mortgage.
A consolidation mortgage is a way to cash in on some of the equity in your home by increasing your mortgage. This extra amount would then be used to pay off all your high interest debts.
It’s basically a mortgage refinance (a way to remortgage your home to pay off your debts), which you can get from your current lender or another financial institution. Your new mortgage will have a new principal amount (how much you owe) and may also have other new terms, such as a different interest rate and new prepayment privileges (these are the principal amounts you can repay in addition to your normal mortgage payments).
Here are some of the types of debt you could consolidate with a mortgage refinance:
• Credit card balances
• Current lines of credit
• Car loans
• Personal loans
• Payday loans
• Second and third mortgages
• Student loans
For people who have high-interest debt that they are struggling to repay, a debt consolidation mortgage is a very useful financial tool, with some key benefits, including:
• You could pay significantly less interest on your overall debt.
• You reduce the amount of your monthly debt payment to one that is much more affordable.
• Multiple loans are consolidated into one easy payment.
• You can reduce your monthly expenses and thus reduce your financial stress.
• The amount you owe will be reduced based on the amortization of your mortgage (how long it will take you to pay off your mortgage).
However, there are a few drawbacks:
• Your new mortgage rate may be higher than your old one, especially now that interest rates have increased significantly this year. If your mortgage balance is much higher than all the other debts you combine, it could end up costing you more instead of less.
• The terms of your new mortgage may be different from those of your old one – the possibility of several less favorable terms could completely negate the advantages of consolidation.
• There are costs associated with a debt consolidation mortgage such as appraisal and legal fees as well as prepayment penalties – these can also wipe out any potential interest savings you may hope to realize .
Is a debt consolidation mortgage right for you?
Your lender will probably still say yes, because they’re consolidating other debts you have with their own institution and earning you more interest. With higher rates, they will be very happy to refinance your current mortgage which is probably at a lower rate right now.
You should discuss your debt refinancing plans with a professional Certified Financial Planner (CFP) before speaking to your bank or mortgage broker. They will be able to objectively examine your overall financial situation and determine what a refinance will really cost you. And if so, they can help you plan a path to set it in motion.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.