Debt Consolidation Through Your Mortgage

Consolidation is not a product. It is a refinance used for a purpose.

Consolidation is not a product. It is a refinance used for a particular purpose, and whether it helps depends entirely on what happens after it closes.

The arithmetic

Unsecured debt carries a rate several times a mortgage rate. Moving it into the mortgage lowers the interest on that balance and replaces several payments with one.

That is the honest benefit, and it is real. The equally honest cost is that a balance which would have been retired in a few years is now amortised over the remaining life of the mortgage, so the total interest paid on it can be higher even at a much lower rate.

Both things are true at once. The comparison to run is monthly relief against lifetime cost, and it should be run with actual numbers rather than assumed.

What has to be true

Enough equity. Conventional refinancing tops out at 80% of appraised value. The debts being cleared, plus your existing balance, plus costs, has to fit under that.

You qualify at the new balance. The consolidated mortgage is larger, and it has to pass the stress test on documented income. Consolidation is not a workaround for not qualifying.

The debts actually close. Lenders generally require the balances to be paid directly at the notary rather than to you. That is deliberate.

The part that decides the outcome

What you do with the freed-up cash flow.

Consolidation works when the cards are closed or the limits reduced and the monthly saving goes somewhere useful. It fails, expensively, when the balances rebuild over the following two years and you now carry both the larger mortgage and the cards again.

That is not a lecture. It is the single most common way this transaction goes wrong, and a broker who does not raise it is not doing the job.

If you do not have the equity

A second mortgage sits behind the first, costs more, and avoids breaking a first mortgage that carries a large prepayment penalty. Useful as a bridge with a defined exit.

A consumer proposal is an insolvency process, not a lending one, and it is sometimes the correct answer. That is a conversation with a licensed insolvency trustee, not with me.

What to have ready

Statements for every debt being consolidated, with balances and rates. Recent mortgage statement, property tax bill, and two years of income documents.

The test

If consolidation converts several expensive, short debts into one cheaper debt and the spending that created them has stopped, it is a good transaction. If only the first half is true, it buys time and costs money. ---

David H. Nataf is a mortgage broker licensed in Quebec by the Autorité des marchés financiers (AMF #3001986744), practising through Groupe Hypothécaire Orbis. He also holds an individual U.S. licence, NMLS #2613311 (Florida), for cross-border files.

This page is for information. Lender programs, rates, requirements and availability vary and can change without notice. Nothing here is tax, legal or accounting advice.

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