The Basics of Debt Consolidation for Ontario Mortgages

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Consolidation of Debt Using Home Equity or a Second Mortgage

The typical Canadian has almost $72,000 in debt and a third of this is non-mortgage debt. For example, a personal loan has substantially higher interest rates than an installment loan. A debt consolidation mortgage may be the answer if you want to pay off high-interest debt and own your house. See how these mortgages operate and what to consider before refinancing:

Why You Should Consider Home Equity Debt Consolidation

This involves consolidating many loans into one, generally with a cheaper interest rate. This allows you to pay off high-interest debt faster. Mortgage rates have been historically low for many years, with lenders providing rates around 2% (compared to credit cards, which normally range from 18% to 25%).

Consolidating debt into a mortgage saves money. Making a single mortgage payment rather than one for each obligation can reduce your total monthly payment. This may free up funds for bills, savings or investments. Consolidating debt might also enhance your credit score. Moving balances from credit cards and other high-interest obligations to mortgages can help.

How a Debt Consolidation Mortgage Works

When you combine debts using one of the mortgage choices listed below, the lender adds the money to your mortgage balance; the money is then utilized to pay off debts. Most mortgages include a clause requiring your lawyer to pay your creditors on your behalf. If they gave you the money, there’s a risk you’ll spend it on something else instead of paying off your debt. This would increase your mortgage amount and add to your current debt. As a result, the loan may be riskier.

Secured Debt vs Unsecured Debt

Before we discuss debt consolidation with a mortgage, it’s important to distinguish between secured and unsecured debt. A secured debt implies something valuable is used as security for the loan. For example, your house is the collateral for a mortgage. If you don’t pay your mortgage, the bank might foreclose on your house.

Unsecured debts do not need collateral; one example is credit card debt. In most circumstances, nothing secures your card debt. The credit card company allows you to “borrow” money at interest based on the likelihood of not paying it back. If you don’t pay the sum owed, they may seize property but not foreclose on your house.

Types of Debt Consolidation Mortgages

Not all mortgages are equal. You may use many mortgages to consolidate your debts, including:

  • First Mortgage Refinancing
  • Second Mortgage
  • Reverse Mortgage

Another alternative is a home equity line of credit (HELOC). This resembles a mortgage in certain respects, but it offers different benefits.

Consolidation Mortgage Benefits

Using a consolidation mortgage to pay off debt leaves you with the same total. So why would you want to combine it?Consolidation Mortgage Benefits Consolidation has several advantages:

Frees Up Cash Flow

Because mortgage interest rates are lower and durations are longer than most other debts, your single mortgage payment will likely be cheaper than the sum of all your previous payments. This allows you to put more money towards home costs, savings or mortgage payments more quickly.

Improves Your Credit Score

Paying off debt is one way to boost your credit score. Paying off high-interest consumer debt can help your debt-to-income ratio. This ratio shows how much debt you have relative to access credit.

Saves Money Long Term

Consumer debt has substantially higher interest rates than mortgages. A mortgage reduces your interest rate and additional payments go straight to the principal. It takes years to pay off debt if interest is all you pay each month.

You can now weigh the benefits of a debt consolidation loan and determine whether it’s best for you. Consolidating is usually beneficial but there are a few things to watch out for. When making long-term financial choices, it’s essential to do enough research, so don’t hurry into anything. Think carefully about which choice is best for you.

Contact us immediately to learn how our licensed mortgage brokers can assist with your debt consolidation loan.

For more information, visit Amansad Financial online or call us at (877) 756-1119 today.