The Pros & Cons of Consolidating Debt Into a Mortgage

If high-interest credit card balances, personal loans, or car payments are weighing you down, you’re not alone. Many Canadians are turning to debt consolidation mortgages as a way to simplify their finances and reduce monthly payments. But before diving in, it’s important to understand how it all works, and whether it’s the right move for you.

In this article:

What Does It Mean to Consolidate Debt Into a Mortgage?
The Pros of Consolidating Debt Into Your Mortgage
The Cons of Consolidating Debt Into Your Mortgage
Is Debt Consolidation Right for You?
Debt Consolidation: Frequently Asked Questions
Looking to Consolidate Your Debt: Talk to The Mortgage Station Today

Need help finding the right mortgage? The Mortgage Station can help! Contact our knowledgeable team of licensed mortgage brokers today at 1-877-512-0007 or info@themortgagestation.ca

What Does It Mean to Consolidate Debt Into a Mortgage?

In simple terms, consolidating debt into a mortgage means rolling your existing debts (like credit cards, lines of credit, or car loans) into your mortgage balance. You essentially refinance your home to access its equity, then use that money to pay off your other debts.

Because mortgage rates are generally much lower than credit card or unsecured loan rates, this strategy can help reduce your overall interest costs and make budgeting easier.

Common reasons Canadians choose to consolidate debt into a mortgage include:

• High-interest debt that’s become unmanageable
• The need to simplify multiple payments into one
• A desire to improve cash flow or credit standing

If you’re new to refinancing, check out Your How-To Guide to Refinancing Your Mortgage for a full breakdown of how the process works in Canada.

The Pros of Consolidating Debt Into Your Mortgage

There are several advantages to using your home’s equity to pay down other debts.

1. Lower Interest Rates

Mortgages tend to have much lower interest rates than credit cards or personal loans. By shifting your debt to your mortgage, you could save thousands in interest over time.

2. Pay Less In Interest

Mortgage interest in Canada is calculated semi-annually, while credit cards and lines of credit compound monthly at much higher rates. That combo makes unsecured debt grow faster and cost more over time. By rolling it into your mortgage, you benefit from a lower rate that compounds less often, helping you save on interest.

3. One Easy Monthly Payment

Managing one predictable payment instead of several scattered ones can take a huge mental load off your shoulders. It simplifies budgeting and helps ensure you stay on track.

4. Repayment Flexibility and Control

When refinancing, you can choose to maintain or increase the amortization, which is the speed at which you are repaying the principal of the loan. With a higher amortization, the payments are lower, providing cash flow relief, while a shorter amortization will pay down the balance faster. The cash flow saved by consolidating can allow you to afford a higher mortgage payment, paying the debt and your mortgage years sooner!

In addition to this, mortgages offer prepayment privileges, typically 15% – 20% of the original mortgage amount. Many banks and lenders will accept these “extra” payments throughout the term (not just on the anniversary) and with minimums starting at $100, which fully goes to reducing the principal of the mortgage.

So, improving cash flow with lower payments or speeding up the repayment, YOU are in control!

5. Improved Credit Score

If you’ve been juggling multiple payments or missing due dates, consolidating your debt can stabilize your repayment history, helping to improve your credit score in the long run.

Also, loans with preset payments are considered a less risky form of credit over revolving credit, like credit cards and lines of credit, where the minimum payments barely keep up with the interest amount. Plus, any principal repaid can be drawn again, making it harder to pay the balances down to $0.

The Cons of Consolidating Debt Into Your Mortgage

Of course, this option isn’t without its drawbacks. Here’s what to watch for.

1. You’re Using Your Home as Collateral

When you consolidate through a mortgage, your home backs the loan. If you can’t make your payments, you risk losing your property. It’s essential to ensure the new payments fit comfortably within your budget.

2. Longer Repayment Term

Spreading your debt over a longer mortgage term can reduce monthly payments but may increase the total interest you pay over time. It’s a trade-off between short-term relief and long-term cost.

3. Lifestyle and Spending Habits

Debt consolidation can wipe the slate clean, but only if you change the habits that led to debt in the first place. Continuing to rely on credit cards or loans could quickly undo your progress.

Is Debt Consolidation Right for You?

The decision depends on your goals, financial stability, and spending habits. Consider:

• Your income stability: Can you reliably make the new payments?
• Your financial goals: Are you trying to save interest, simplify payments, or improve credit?
• Your current mortgage terms: Refinancing could trigger penalties if you break your term early.

If you’re unsure whether this approach fits your situation, a professional mortgage broker can help you crunch the numbers and explore all options. Not sure who to call? Learn about the difference between a mortgage agent, broker, and specialist to understand who can best support you.

Debt Consolidation: Frequently Asked Questions

1. Can you consolidate debt into a mortgage in Canada?

Yes. Homeowners can refinance their mortgage to access up to 80% of their home’s appraised value and use that money to pay off higher-interest debts.

2. Will I save money by consolidating debt into my mortgage?

Usually, yes, especially if your credit card or loan rates are significantly higher than your mortgage rate. But it depends on your term length and total debt load.

3. Do I need good credit to consolidate debt into my mortgage?

While a stronger credit score helps you qualify for better rates, there are options through both traditional and alternative lenders for those rebuilding their credit. Learn the difference between traditional and alternative lenders.

4. Is it better to consolidate debt or refinance my mortgage?

They often overlap! Debt consolidation typically involves refinancing, but refinancing can also be used for other goals, like funding home improvements or investing.

5. Can I use RRSP funds to help with debt or mortgage goals?

In some cases, yes. Learn how to maximize RRSP contributions for mortgage goals to strengthen your financial position long-term.

Looking to Consolidate Your Debt: Talk to The Mortgage Station Today

Consolidating debt into your mortgage can be a smart, strategic way to lower interest costs and regain control of your finances, but it’s not the right fit for everyone. Before making any decisions, talk to a trusted mortgage professional who can review your full financial picture and help you weigh your options.

The team at The Mortgage Station is here to help you make confident, informed choices about your debt and home equity.

Call us toll-free: 1-877-512-0007
Email: info@themortgagestation.ca

Take control of your finances today; the right advice could save you thousands tomorrow.