There are a number of products you can use to consolidate your debt with the equity in your home:
- Second mortgages
- Refinancing your mortgage
- Home Equity Lines of Credit (HELOCs)
- Reverse mortgage loans (you must be 55+ to qualify for this product)
The best one for you depends on your unique financial situation. A mortgage broker or financial adviser can help you decide which is best for you. We’ve broken down each option:
Debt consolidation through a second mortgage is an option if you already have a mortgage and have a substantial amount of equity in your home. Taking out a second mortgage can help you access up to 80% of your equity, which you can then use to pay off your debts. The interest rate on your second mortgage will be higher than the one on your first mortgage. The reason is, if you default on your first mortgage, the lender will be able to use your property as collateral but the lender of the second mortgage does not have the same guarantee (since your second mortgage is backed by your first mortgage). If you decide to take out a second mortgage, you will make two mortgage payments a month.
Debt consolidation through mortgage refinancing is one option for current homeowners. Refinancing requires you to break your current mortgage contract and get a completely new one. You consolidate debt with the new mortgage. This debt consolidation strategy is also referred to as remortgaging your home.
The advantage of this approach over taking out a second mortgage is that you will only have one loan to pay back and you will also pay less interest each month. However, your lender will charge you fees for cancelling your old mortgage, usually in the thousands of dollars.
You can refinance your mortgage with a cash-back mortgage, which provides a mortgage loan plus some cash, which you can use for debt consolidation purposes.
Here’s how it works: you get a mortgage that’s more than the value of your property and the difference can be used towards your debt. Cash-back mortgages for debt consolidation are a product even first-time homebuyers can take advantage of.
Home equity line of credit (HELOC)
Another popular debt consolidation tool is are home equity mortgage loans. Unlike the previous debt consolidation tactic — refinancing your mortgage with a new loan — HELOCs operate like a line of credit that is secured by the equity in your home.
A home equity loan isn’t a product you can roll into your mortgage. It’s a product that is both secured and that draws on your home’s value.
Since it isn’t a loan that’s paid out in a lump sum, you can use however much you desire at any given time. Plus, you only pay interest on what you use. However, you diminish the amount of equity you have. There’s also usually a one-time origination fee.
Reverse mortgage loans
You can borrow up to 55% of the current value of your home with a reverse mortgage loan for the purpose of debt consolidation. What do we mean by a “reverse” mortgage? It means the bank can release a portion of your home’s value and give it back to you for you to use in any way you wish. Unlike a HELOC, you don’t have to pay the loan back monthly. The loan is due when you move out of your home, sell it, or the last borrower dies. You can receive the money as a lump sum or take a portion upfront. However, taking out a reverse mortgage will decrease, or even eliminate, the amount of equity you have in your home. There are also age restrictions on who can get reverse mortgages in Canada. In order to qualify, you must be a homeowner and be 55 or older.