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It's Your Money  

Mortgage refinancing to consolidate debt

Consolidation mortgages

Managing debts with steadily increasing interest rates can feel like an uphill struggle.

Monthly debt payments can take over a large chunk of your income, and it can feel like it will take forever to pay off the amount you owe.

For example, if you carry a balance on your credit cards, you could typically be paying 19.99 per cent in interest. If you owed $5,000 on a card like this, the annual interest would be $999. If you only paid $150 off your credit card every month, only around $67 would go towards paying off the amount you owe. It would take you over four years to pay it off in full, and you would end up paying $2,357 in interest.

Similarly, personal loans, lines of credit, payday loans and auto loans can all have increasing interest costs and add financial stress. Juggling so many debts and paying so much in interest can make it difficult to get ahead financially.

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) are making each month harder than the one before. This is why many homeowners are considering a debt consolidation mortgage.

A consolidation mortgage is a way of cashing in some of your home’s equity, by increasing your mortgage. This additional amount would then be used to pay off all of your high-interest debts.

It is effectively a mortgage refinance, (a way to remortgage your house to pay off debts), which you can take out with either your current lender or a different financial institution. Your new mortgage will have a new principal amount (how much you owe) and could also have other new terms, such as a different interest rate and new prepayment privileges (these are the amounts of principal you can pay off on top of your normal mortgage payments).

Here are some of the kinds of debts that you could consolidate with a mortgage refinance:

• Credit card balances

• Outstanding lines of credit

• Auto loans

• Personal loans

• Payday loans

• Second and third mortgages

• Student loans

For people who are carrying high interest debt that they’re struggling to pay off, a debt consolidation mortgage is a very useful financial tool, with some key advantages, including:

• You might pay considerably less interest on your debt overall.

• You reduce your monthly debt payment amount to one that is far more affordable.

• Several loans are consolidated into one easy payment.

• You can lower your monthly outgoings and so reduce your financial stress.

• The amount you owe will be reduced according to your mortgage’s amortization (the length of time it will take to pay off your mortgage).

There are some disadvantages, however:

• Your new mortgage rate may be higher than your old one – especially now that interest rates have gone up significantly this year. If your mortgage balance is a lot more than all of the other debts you are combining, this could end up costing you more instead of less.

• The terms of your new mortgage may be different from your old one – the potential for several less advantageous terms could fully negate any benefits of consolidation.

• There are costs involved with a debt consolidation mortgage such as appraisal & legal fees plus pre-payment penalties – these too can wipe out any potential interest savings that you may be hoping to attain.

Is a debt consolidation mortgage right for you?

Your lender will likely always say yes as they’re consolidating other debts you have with their own institution and earning more interest off of you. With higher rates, they’ll be very happy to refinance your current mortgage that is likely at a lower rate right now.

You should discuss your plans to refinance debt with a Certified Financial Planner (CFP) professional before you talk to your bank or mortgage broker. They’ll be able to look at your overall financial situation objectively and determine what a refinancing will really cost you. And if appropriate, they can help you plan a path to put it in motion.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Brett has worked in the financial advice industry for over 15 years and is designated as a chartered investment manager(CIM) and certified financial planner (CFP).

In 2014, Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB), which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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