That being said, this option isn’t for everyone and depends on your financial situation. That said, there are other ways to tap into your home’s equity without refinancing. If refinancing is ideal for you as a homeowner, there are many benefits that come with it. If not, don’t worry, there are other options available to you as well. Let’s go over how you can roll your debt into your mortgage and what it would look like if you did.
When Can you Roll Your Debt into your Mortgage?
When it comes to getting a debt consolidation mortgage, the timing does matter. Unless you have a chattel mortgage or a different mortgage structure for a modular home, you can only renew your mortgage at the end of your term. Most are five years or less.
Breaking this term early can result in a penalty and even legal fees, so it isn’t always a wise decision to refinance early. It really depends, though, on what the penalty is for breaking the term and if it makes sense for you to do so or not.
The easiest time to consolidate your debt into your mortgage is when you renew your term. When you renew, you have access to 80% of the equity in your home above what you owe on your mortgage. Depending on your home’s value and the debt you want to consolidate, this could be a really good option for you.
If you are looking to consolidate debt when purchasing a home, it could be slightly more difficult. To do this, you would need to be approved and have a down payment for a mortgage that includes the debt you are consolidating. So, if it were your first home, you would need 5% of the total amount, and 20% if it isn’t. You would need to speak with your lender to verify that this is something you can do.
Rolling Debt into a New Mortgage
As mentioned above, while it isn’t relatively easy, rolling your debt into a new mortgage is doable. That being said, most lenders don’t really like to lend more money than what you are purchasing the home for. If you have good credit and the only thing stopping you from purchasing the home is your debt-to-income ratio, then discussing consolidating your debt into the mortgage may be the way to go.
The only thing about rolling the debt into your mortgage is that the lender will likely require a higher down payment to cover the excess above the mortgage amount. Depending on how much your debt is, you may be better off using that extra down payment money to pay off the debt directly before lumping it into your mortgage. It really just depends on how much you need to pay off and what you need to do to make the home purchase affordable, as well as to afford your loan payments.
Pros and Cons of a Debt Consolidation
Rolling your current debt into your mortgage can be extremely helpful, but there are some downsides to it as well. It is important to consider all angles before you make any decisions.
Pros
Some positive aspects of consolidating your debt into your mortgage include that mortgage interest rates are among the lowest you can get. If you have a high debt balance and are only paying interest on it, or have a lot of credit card debt, rolling it into your mortgage can dramatically reduce your overall debt payments by creating one monthly payment. Because a mortgage is essentially a secured loan, in which the bank can seize the asset if the debt isn’t paid, it allows the bank to offer the loan at a lower interest rate.
By consolidating your debt into your mortgage, you also significantly reduce your monthly payments. Putting all of your debts into one payment not only saves a ton of money, but it also gives you a fixed payment over a fixed period of time. This is different from a HELOC (Home Equity Line of Credit), which only requires interest payments and is accessible at any time, just like a standard line of credit. A consolidation mortgage only takes out the money required to pay off the debt. You need to refinance your mortgage to access more money.
Cons
While there are some great things about a consolidation mortgage, there are also a few downsides to keep in mind. The first is that the debt will be spread over the term of your mortgage, so it could take quite a while to pay off.
The second negative is the amount of interest you will need to pay. While your interest rate may be lower than it was before, it is still possible that you could end up paying more interest. This ultimately depends on the term of your mortgage and the amount you consolidated.
Types of Debt you Can Roll into your Mortgage
When it comes to getting a debt consolidation mortgage, the type of debt you have doesn’t really matter. All that matters is that you have the equity to cover the amount you are using to cover the debt. Whether you are looking to pay off high-interest debt such as credit card debt, lines of credit, payday loans or even unsecured loans, it doesn’t really make a difference.
Whatever you use the money for, remember that it is now secured to your home, so it is extremely important that you make the payments. If you don’t, the bank could repossess it.
Rules for Debt Consolidation Mortgages in Canada
Whether your mortgage lender is an alternative lender, bank, or credit union, the general rules for a debt consolidation mortgage are the same. You can borrow up to 80% of what your home is worth, minus what is owing on the current mortgage. This can give you access to a lot of money, but it ultimately depends on your financial institution and whether you are approved.
They are looking for a good credit score and a good credit history. If you have a good relationship with your lender, then they should be able to come up with a solution to help you with your debt consolidation. That being said, even if you don’t get approved for a debt consolidation mortgage, other options use your home equity.
How Debt Can Affect You Getting a Mortgage
In short, yes, your debt can affect your ability to get a mortgage. An important factor when considering a mortgage is your debt-to-income ratio. This ratio is based on your monthly income versus your monthly debt payments. Things included in this are:
- minimum credit card payment
- line of credit monthly interest payments
- vehicle loan payments
- unsecured and secured loan payments
- other mortgage payments
Really, the lender is looking to see that these monthly debt payments are below the recommended 40% of your monthly income. Depending on which lender you go with, they could allow up to 50% for your DTI, but the lower this ratio is, the better.
Not only does it give you more lending room, but it also helps to keep your credit score higher and get you a lower interest rate. Having a high DTI is risky for a lender, so it would likely be more difficult to get exactly what you are looking for.
Alternatives for a Consolidation Mortgage
For some people, a debt consolidation mortgage is the best option for them. Other people prefer to go with a debt consolidation loan, HELOC (Home Equity Line of Credit), or a home equity loan instead. There is always the option of a debt consolidation program, but people tend to go with other options first if they can. There are a few differences between these and a debt consolidation mortgage.
Debt Consolidation Loan
A debt consolidation loan, unlike a consolidation mortgage, is an unsecured debt. This means it is not tied to an asset like a house or a car. For this reason, interest rates are usually higher than they would be with a consolidation mortgage or any other form of secured loan.
The nice thing about a debt consolidation loan is that it has a fixed term and fixed payments. Most lenders also allow for open loans, meaning that, along with your scheduled payments, you can put money down on the principal whenever you want. If you go with an open loan, this can also save you a lot of money on interest.
HELOC
A home equity line of credit allows you to borrow money from your home equity without refinancing your home. The loan-to-value ratio available with a debt consolidation mortgage is a bit higher, though. Only 65% of the value minus the current mortgage is available with a HELOC. The only difference is that you do not have a set payment on the principal; you only make monthly interest payments.
While this is convenient, it isn’t always the best option unless you’re certain you can pay it back. A HELOC is a secured line of credit and is tied to your home. Just like with a consolidation mortgage, if you do not make the payments, your home can be used as collateral. However, unlike a mortgage, you can withdraw and pay back the money from a HELOC as often as you like.
Home Equity Loan
Finally, another option available is a home equity loan. How this works is similar to a HELOC, except it is a secured personal loan. While it is tied to the equity in your home, it is separate from your mortgage, so you can avoid a refinancing fee if it is not time for you to renew your mortgage.
The nice thing about a home equity loan is that it provides upfront cash and has a fixed payment. Being that home equity loans are secured loans, they will have a lower interest rate, and, as long as you can verify that you will be able to make the payments, it is also a good option for a consolidation loan.
How Much Equity Do You Need to Roll in Debt
If you’re looking to roll your debt into your mortgage, you’re generally going to need at least 20% equity. This is because OFSI regulations state that your total secured debt can’t exceed 80% of your home’s appraised value.
How Rolling Debt into a Mortgage Can Impact Your Credit Score
Just like when you acquire any new form of debt, you’re going to initially see a decrease in your credit score. However, because you ultimately will be reducing your credit utilization ratio, especially if you consolidate credit card debt, you will see an increase in your credit rating over the long term.
Rolling Credit Card Debt into a New Mortgage
When you’re looking into rolling credit card debt into a new mortgage, you do need to refinance your existing mortgage. Whether you’re looking to consolidate one debt or multiple debts, it doesn’t matter, since it will change your combined credit card debt into secured debt and increase your mortgage balance. You will also no longer have credit card balances.
Debt Consolidation Through Mortgage Refinancing and CMHC Insurance
If you’re looking to get some debt relief and free up some cash flow, you can save money by consolidating unsecured debts. However, you can’t add standard debt consolidation to a CMHC-insured mortgage. If you choose to refinance your mortgage and combine multiple debts, then you need to do so with an uninsured mortgage.
The Break Penalty for Refinancing Mid-Term
While there aren’t any legal fees involved with refinancing a mortgage, there could be a penalty for breaking your mortgage early. For a variable-rate mortgage, there are typically interest costs to be paid, specifically three months’ interest. For fixed-rate mortgages, the penalty is either three months’ interest or an interest rate differential.
While you do have to consider the penalty cost, lower monthly payments could save you more money. Not having any outstanding debt means you have only one monthly payment, which could save you more than the penalty would cost.
The Tax Implications of Refinancing to Consolidate Debt
When you refinance to consolidate your debt, there are no tax implications. Since the funds are going to be used to reduce your other non-mortgage balances, you will have no additional existing debts. This will be the case no matter what you choose to consolidate, including:
- Car loans
- High-interest loans
- Multiple bills
- Multiple credit cards
- Other unsecured debt
The Best Lenders for Debt Consolidation Mortgages in Canada
When you’re looking to consolidate your debt into your mortgage, the best place to start is with a mortgage broker. They can help you find the best debt consolidation options when refinancing, as well as the best mortgage rates. If you don’t wish to work with a mortgage broker, then you can speak to a financial advisor at one of the top banks, including:
- RBC
- TD
Scotiabank - BMO
- CIBC
Refinancing Vs. a HELOC for Debt Consolidation
Both refinancing and HELOCs are forms of secured debt; they do work a little differently.
Refinancing: This is a single lump sum loan that offers fixed, low-interest rates. That said, you do have to requalify for the full mortgage amount.
HELOCs: These are revolving credit lines with variable interest rates that are often higher than those on mortgages. There are minimal fees; typically, only interest needs to be paid for a certain period, and it acts as a second loan on your home.
How Long Does Debt Consolidation Refinancing Take to Close
From the start of the application process to the final closing date, the process usually takes 30 to 45 days. This has a lot to do with the fact that our appraisal value has to be assessed, as well as how much debt you’re looking to add to your mortgage from your other debts. Also, whether or not you’re doing a cash-out refinance will make a difference.
Risks of Converting Unsecured Debt to Secured Debt
The biggest risk when converting your unsecured debt into secured debt is losing your home. If you miss any payments, the bank can seize your home to cover the costs. It can also make it tempting to use your now-free credit limits, which can put you in more debt and hurt your credit reports.
Alternatives to Rolling Debt into Your Mortgage
If you can’t make your minimum payments, there are some alternative ways you can consolidate your debt without rolling it over into your mortgage. These include:
Credit Card Balance Transfers: With these cards, you can transfer the balance to another credit card for a promotional period at 0% interest. This allows you to save money on interest, with all of your money going into the principal balance.
Unsecured Consolidation Loan: This allows you to take out a personal loan to consolidate your mortgage payments. This doesn’t put your home at risk but still allows you to get a lower interest rate than on your original debt.
Personal Line of Credit: This form of revolving debt provides access to funds you need at a lower variable interest rate. With most lines of credit, only interest payments are required.
Debt Management Program: If you’re looking for help with your money management skills or want some help with debt management, a credit counsellor can help you with a debt management plan. Depending on your situation, a consumer proposal or bankruptcy might also be an option.
How Can Spring Financial Help?
Not only does Spring Financial specialize in personal loans for all credit types, but we also offer mortgages and can help you consolidate debt with home equity. Our online application is fast and can be completed in as little as 3 minutes.
For a personal loan (consolidation loan), you can receive the money as fast as the same day of approval. To consolidate your debt into your mortgage, you can also apply online, and we will start working on getting you your money right away. For whatever reason you need the money, Spring Financial can help.
