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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 before it is over 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 the value of your home and what debt you are wanting to consolidate this could be a really good option for you.
If you are looking to consolidate debt when you are purchasing a home, this could be slightly more difficult. In order to do this you would need to be approved and have the down payment for a mortgage that includes the debt you are consolidating. So if it was your first home you would need 5% of the total amount and 20% if it isn’t. You would need to speak to your lender in order to verify 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, though, and the only thing stopping you from purchasing the home is your debt to income ratio, then discussing consolidating 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 want a higher down payment to cover the cost of the extra money 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 purchase of the home affordable, as well as 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 is that mortgage interest rates are some of the lowest interest rates you can get. If you have a high debt balance you are only paying interest on 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 where the bank can seize the asset if the debt isn’t paid, it allows them to provide the loan at a lower interest rate.
By consolidating your debt into your mortgage, this also significantly reduces your monthly payments. By putting all of your debts into one payment not only saves a ton of money, but it gives you a fixed payment over a fixed period of time. This is different from a HELOC (Home Equity Line of Credit) that 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 in order to gain access to 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 being that the debt will be stretched over the period 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 or your mortgage as well as 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 reason you use the money for, it is important to remember that this money 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
No matter if your mortgage lender is an alternative lender, bank or credit union, the general rules of 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 is up to your financial institution and if you are approved. They are looking for a good credit score as well as 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, there are other options available that involve the equity in your home.
How Debt Can affect you Getting a Mortgage
In short, yes your debt can affect you getting a mortgage. An important factor when looking into getting 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 end up going 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 Options 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 some of these options first if they can. There are a few differences with these from 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 they are also on a fixed term with fixed payments. Most lenders also allow for open loans, meaning that, along with your scheduled payments, you can put money down on the principle 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 that is available from 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 with it is that you do not have a set payment on the principle, you only make the interest payments monthly. While this is convenient, this option isn’t always the best unless you can be certain you can pay the money 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 the 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 is an upfront cash loan and has set payment. Being that home equity loans are secured loans, it will have a lower interest rate and, as long as you can verify that you will be able to make the payments, is also a good option for a consolidation loan.
How Can Spring Financial Help?
Not only does Spring Financial specialize in personal loans for all credit types, but we also do mortgages and can help consolidate your 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 the reason you need the money, Spring Financial can help.
