Debt consolidation mortgages in Canada

How it works, step by step

A debt consolidation mortgage is really just a mortgage refinance with a specific purpose. Your existing mortgage gets paid out and replaced with a larger one. The difference goes to your creditors. Most people we talk to are carrying a mix: a couple of credit cards, a car loan, maybe a line of credit that crept up during a tough year.

1. 1

   List every debt

   Write down each balance, rate and monthly payment for the credit cards, car loan and lines of credit you want to clear.

2. 2

   Check your equity

   Your existing mortgage plus the debts and any costs you roll in should stay at or under 80% of your home's appraised value.

3. 3

   Price the refinance

   Get your prepayment penalty from your lender and add appraisal and legal costs, then compare against the interest you'd stop paying.

4. 4

   Apply and requalify

   Submit income and debt documents; the lender stress-tests the full new mortgage balance.

5. 5

   Close and pay out the debts

   Your lawyer pays out the old mortgage and the listed debts directly from the new mortgage funds.

Worked example: consolidating credit cards and a car loan

The numbers below are illustrative. The rates are assumptions chosen to show the math, not current market rates or an offer. Payments use simple monthly compounding and are rounded.

That looks great, and the cash-flow relief is real. Look at what happens over the long run, though. If that $54,000 rides along for the full 25 years, it costs roughly $36,000 in interest by the time it's paid off. Keep the amortization at the 22 years they already had left and the payment is about $2,712, still around $1,065 a month lower than today, with roughly $31,000 of interest on the added amount.

The strongest version of this plan pays the debt off fast. If they put about $1,000 a month extra toward the mortgage (still less than they were paying the card companies and the car lender), the $54,000 is cleared in about five years with roughly $6,400 of interest. Same household, same rate, very different total cost. Most lenders allow annual prepayments, so this is something you can build into the plan from day one.

What it costs to consolidate

Because you're breaking your mortgage, the usual refinance costs apply. The big one is the prepayment penalty. On a fixed rate it's the greater of three months' interest or the interest rate differential (IRD), and the IRD can run into the thousands depending on how far rates have moved since you signed. On a variable rate it's usually three months' interest.

• Prepayment penalty: ask your lender for a written quote before deciding
• Appraisal: typically $300 to $500
• Legal fees: typically $800 to $1,500
• Discharge or reassignment fees charged by your current lender

Timing matters. If your term is up within the next several months, consolidating at mortgage renewal can wipe out the penalty entirely, because there's nothing left to break. Some lenders also let you blend and extend, adding new money at a blended rate without a full penalty. It's worth asking.

The trade-offs to weigh honestly

Who qualifies

With a bank or credit union, you'll generally need enough equity to stay at or under 80% loan-to-value after the debts are added, income that supports the new payment at the stress test rate, and a credit history that's in reasonable shape. Paying off the cards actually helps the debt-service ratios, since those minimum payments drop out of the calculation.

When equity or credit is tight

• Alternative lenders. Some lenders look past late payments, a recent consumer proposal or income that's hard to document. Expect a higher rate and a lender fee, and treat it as a one- or two-year bridge while you rebuild credit.
• A second mortgage. A separate loan registered behind your existing mortgage. Your first mortgage and its rate stay as they are, so there's no penalty to break it. Rates are higher and terms are short, so it's usually a stopgap until renewal.
• A home equity line of credit. If you have room and want flexibility, a HELOC secured on your home can pay out the cards without touching your mortgage. The revolving part is capped at 65% of your home's value.
• Wait for renewal. If you're within a few months of maturity, timing the consolidation to your renewal date avoids the penalty altogether.

If you're self-employed, lenders will look at two years of tax returns and Notices of Assessment. Some lenders have programs that put more weight on business bank statements when you have a larger equity cushion.

What it does to your credit

Expect a small dip when the lender pulls your credit. Once the cards are paid to zero, your utilization falls, and that usually helps your score over the next few statement cycles. Keep the oldest card open with a zero balance if you can trust yourself with it; closing your oldest account can shorten your credit history. What you want to avoid is new balances creeping back on.

Documents to have ready

• Recent pay stubs and a letter of employment, or two years of T1 Generals and Notices of Assessment if self-employed
• Your current mortgage statement and property tax bill
• Recent statements for every debt you want paid out (cards, car loan, lines of credit)
• Government-issued photo ID
• Home insurance details and, for condos, recent strata or condo fee information

Consolidating debt in your city

Home values and typical equity positions vary a lot across the country, which changes how much room you have to work with. We have local guides for debt consolidation in Toronto, Calgary homeowners rolling debt into a mortgage and consolidation options in Vancouver, with more cities listed below.