Debt Consolidation
A lower payment is the easy part. A lower total cost is the goal.
If you carry balances on credit cards, a line of credit or a car loan, your home's equity can pay them out at a mortgage rate. Spread over a long amortization, though, those balances can cost more in total. Getting that part right is the job.
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When homeowners consolidate
Consolidating means using home equity, through a refinance or a HELOC, to pay out other borrowing. These are the usual reasons.
Higher-interest balances
Credit cards, unsecured lines and loans usually cost more than borrowing secured by a home. Paying them out with equity replaces several rates with one.
A balance owed to CRA
Self-employed homeowners sometimes use equity to clear a tax balance, because CRA keeps charging interest on overdue amounts until they are paid.
A term that is ending anyway
If your mortgage is coming up for renewal, consolidating then avoids a prepayment penalty, the cost that most often decides whether consolidating pays.
How consolidation works
List what you would pay out
Each balance, its rate and its monthly payment. Not every debt is worth moving: a low-rate loan near its end can cost more inside a mortgage than outside it.
Check the equity
A refinance can total up to 80% of the home's appraised value; a HELOC's revolving part, up to 65%. Your income, other debts and the stress test decide how much you qualify for.
Compare total cost, not just the payment
Stretching short-term balances over a long amortization lowers the payment and can raise the total interest. Keeping your payment close to what you paid before, or using prepayment privileges, closes that gap.
Pay out at closing
The lawyer pays the creditors directly from the new mortgage, so the balances are cleared on closing day. Lenders often make that a condition of the approval.
What to weigh before you consolidate
Payment versus total cost
A lower monthly payment can still mean more interest overall if the balances are repaid over decades. Compare both numbers before you decide.
The stress test applies
Consolidating through a refinance is qualified at the greater of 5.25% or your contract rate plus 2%. Borrowing more means it is not a straight switch, so that exemption does not apply.
Penalties and fees
Breaking a term early usually costs three months' interest on a variable rate; on a fixed rate, usually the greater of three months' interest or the interest-rate differential. Add appraisal, legal and title costs.
Keeping the balances at zero
Consolidation only helps if the paid-out cards and lines stay paid off. An open line of credit makes it easy to borrow again, so some homeowners lower the limits on the accounts they clear.
Rates and figures shown are illustrative, subject to change without notice, and are not an approval or a commitment to lend.
Straight answers
Usually credit cards, unsecured lines of credit, and personal and car loans; in some cases, tax owed to CRA. The lender decides what it will pay out, and often requires the payouts to be made at closing.
It lowers the rate on the balances you pay out, which usually lowers the monthly payment. Whether it lowers the total cost depends on how fast you repay: over a long amortization, total interest can be higher. Running both numbers is the point of the review.
Yes, through a refinance: the greater of 5.25% or your contract rate plus 2%. A straight switch at renewal is exempt only when no new money is borrowed, and consolidating always borrows more.
A refinance suits paying out a set list of balances on a fixed schedule. A HELOC suits money you will draw over time. For consolidation, a refinance's fixed payments make it harder for a balance to linger.
Some lenders will refinance to pay CRA directly at closing. The file needs clear income documentation, which is a large part of what Rohit does. The CRA article linked below walks through how it is structured.
A refinance involves a credit check, and paying out revolving balances changes how much of your available credit is in use. How a score responds varies, so no one can promise a particular change.
Related reading
Two worked articles on consolidating with equity, and how the refinance itself works.
See whether consolidating with home equity adds up
Run our 60-second Refinance & Equity Savings Check to see your accessible equity and monthly payment options. Rohit reviews every file personally. No credit check to start.
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