With high-interest debts on their plates, Canadians have a good reason to consolidate their debt into a mortgage. According to Statistics Canada, non-mortgage debts in Canada went up by 0.4% (approximately $786.2 billion) in May 2021, while mortgage debt rose to around $57.5 billion, hitting an all-time high.
Considering the sky-high interest rates on credit cards and other personal loans, it sounds wise and logical to consolidate your debts into a mortgage as it enables you to pay all your debts in a shorter amount of time, with a much lower interest rate, and that too, without having to worry about paying multiple monthly payments.
Canada’s mortgage rules set in 2018 have impacted borrowers by setting stress tests. But all you need is a few calculated steps to navigate through the process. Are you wondering why going for debt consolidation into a mortgage is a top strategy? Read on to find out, and you can also visit this site: https://alpinecredits.ca/consolidating-debt-into-a-mortgage/ to know more about consolidating debt into a mortgage.
What Is Debt Consolidation?
Consolidation of debt into a mortgage is a potent way to reduce the unfathomable burden of debts over your head by using your home equity as security. Simply put, debt consolidation means merging multiple high-interest debts and dues into one payment by taking out a new larger loan against equity to pay them off.
While you consolidate your debts into a mortgage, your lender uses your equity to secure the loan amount. The higher equity you have, the higher your chances of getting a higher loan amount at a much lower interest rate.
Besides, your lenders will give you a mortgage loan based on your loan-to-value ratio (LTV) — the highest LTV to get one such loan is 80%.
Why Consolidate Your Debts Into A Mortgage?
The high-interest debts from credit cards, personal loans, student loans, payday loans, or other financial liabilities can cause a lot of financial stress. This is where debt consolidation comes into the picture.
Firstly, consolidating your debts into a mortgage means spreading your debts for the long run. It makes your financial calendar much more organized since you now repay only a single loan instead of multiple debt payments.
As a Canadian, a mortgage loan is quite the catch since the mortgage rates in Canada are considerably low. By consolidating your debts, you get your hands on a lower interest rate that can go as low as 4%. Meanwhile, the 20% interest rates charged by credit card companies are around the 20% mark.
Moreover, when you consolidate your debt, you will be able to pay more than the minimum due on your credit card. This comes in very handy in improving your credit score.
Although consolidating debt lowers your interest rate to an impressive extent, saving you hundreds of dollars monthly, you may still need to pay other fees when applying for a mortgage loan. These include a penalty for refinancing your mortgage, appraisals, legal fees, title insurance, etc.
Consolidating Debt Into First-Time Mortgage
You can apply for a mortgage even if you do not currently own a house or are a first-time buyer, given that your LTV ratio meets the benchmark.
LTV ratio indicates that to qualify for a first-time mortgage, your loan size should be smaller than the value of the home you intend to buy — usually by 20% at least. Thus, if your loan-to-value ratio is too high, say higher than 80%, there are high chances that a lender will deny you a loan.
You can also get a debt consolidation by refinancing your mortgage, for which you need to break your current mortgage agreement and combine your high-interest debts and the existing mortgage to pay it all together with a single equated monthly installment (EMI). Alternatively, you can get a second mortgage with a private lender or through the Home Equity Line of Credit (HELOC).
Things To Consider When Consolidating Debts Into Mortgages
Before consolidating your debts into a mortgage, we suggest you do some research and calculation to put yourself in a position to take full advantage of the scheme. Here are nine factors you need to pay attention to before and during you go for debt consolidation:
- First, enlist the debts you want to consolidate into a mortgage. Depending on your calculation, try to figure out the approximate amount you will pay per month to pay your new loan. This will help you zero in on your preferred term for the payment.
- Before applying for a loan, make sure you have a good credit score and the required equity making you eligible to apply for a debt consolidation loan in the first place.
- Do your homework regarding the terms and conditions of your lender, interest rate and other intricacies before advancing with a mortgage loan. The best-case scenario would be if you went for a loan with a lower interest rate.
- Plan beforehand so you can continue paying the monthly loan amount even if you have an unexpected reduction in your income.
- Using your equity will save you from eventually running out of any.
- If possible, pay more than the monthly minimum amount.
- Plan out your expenses for the month — big and small. Leave some room for contingencies like medical bills, birthday parties, etc. Stick to this plan to live a stress-free life.
- Refrain from using your credit card to make extra payments until you are completely debt-free. Ignoring this advice would mean increasing your debts, making it impossible for you to get rid of your existing debts for good.
Consolidating your debts into a mortgage allows you to pay off your debts sooner and at a much lower price, thanks to the reduced interest rate. But the fact remains that debt consolidation is, at the end of the day, a debt too.
So, deal with it in a calculated and sensible manner — plan your repayments, put some money aside as reserves for dry months, and avoid unnecessary expenses, especially on your credit card.