Should you refinance your mortgage to pay off credit cards and other debts?

A guide in the Mortgage Trouble centre

A debt consolidation mortgage can lower the cost of expensive debt and make the household budget work again. But if the new payments are still unaffordable, borrowing against your home may leave you with a larger mortgage and the same monthly shortfall.

The question is whether the loan solves the problem that brought you to a licensed mortgage professional, such as a mortgage broker or agent. Your debts may have grown after a difficult year, or a mortgage renewal may have made the payments harder to afford. Paying off credit cards, a personal line of credit and payday loans takes a realistic budget and a repayment plan.

Unsecured debts, such as ordinary credit card balances, are not backed by your home. When you pay them with a loan secured on the property, the home now backs that borrowing. If you cannot repay it, your home may be at risk. The Financial Consumer Agency of Canada explains borrowing against home equity.

What are your mortgage and home equity options?

Ask your lender or your mortgage broker to explain which arrangement is being offered.

• A mortgage refinance replaces or changes the existing mortgage and may provide additional money to repay other debts.
• A second mortgage is another loan on the property. You continue paying the first mortgage as well.
• A home equity line of credit, or HELOC, lets you borrow, repay and borrow again within an approved limit. Paying only the interest does not reduce what you owe. Some products combine a mortgage and a HELOC.

These are different ways to borrow. The lender is a separate choice. Banks, credit unions and non-bank lenders offer mortgages. Some non-bank lenders serve borrowers who qualify for ordinary mortgage financing. Others offer alternative lending, often called B lending. An alternative mortgage and a private mortgage should not be treated as the same option. Ask your mortgage broker to explain the lender, the costs and why the recommended loan fits your circumstances.

A bank refusal does not mean a private loan is your only choice, or that you are insolvent. Ask your mortgage broker which other lenders might consider your application and whether their terms fit your budget.

Will consolidating debt into your mortgage actually save money?

Start with the debts the loan will pay. List each balance, interest rate and monthly payment. If some debts will remain, keep their payments in the new budget.

Then ask for a written breakdown showing the amount available after mortgage payouts and all costs, including any penalty for breaking the existing mortgage, appraisal, legal, lender and broker fees. A quoted loan amount is not necessarily the amount available to pay your cards.

A lower payment can come from a lower rate, a longer repayment period or paying interest without reducing the balance. Those have different consequences. Ask for the total interest and fees over the period you expect to keep the loan, and the balance you will still owe at the end. The FCAC debt-consolidation guide explains why stretching repayment can increase the total interest cost.

The mortgage term is the period covered by your current agreement. It can end well before the debt is fully repaid. Compare offers over the same period and ask what happens to the remaining balance when each term ends.

Does the new household budget work?

Compare take-home income with all the costs after refinancing: mortgage and other debt payments, property tax, condo fees where applicable, insurance, utilities, food, transportation and the rest of the household’s needs. Allow for repairs and unexpected expenses.

If you will still need credit cards to buy groceries or cover ordinary bills, the shortfall remains. Decide how you will manage the accounts you pay off so that new balances do not build up beside the larger mortgage.

For the fuller housing-cost comparison, read House Poor: When You Cannot Afford Your Mortgage.

When can a private mortgage make sense?

A private loan can be expensive and still serve a useful purpose. It may provide time to complete an orderly sale or reach a realistic refinancing date, provided the household can carry the loan until then.

Ontario’s mortgage regulator, FSRA, warns that private mortgages are generally short-term and can have substantial interest and fees. Its private-mortgage guide stresses the need for a realistic plan to repay or replace the loan.

Ask what must happen before the term ends. If you expect to sell, use a realistic price and allow for selling costs and all mortgage payouts. If you expect to refinance, identify what will change in your income, credit or debt position. Also consider what you would do if the sale or new financing takes longer than expected.

Renewal is not a repayment plan you can take for granted. Find out when the full balance becomes due and what it would cost to renew or repay early.

When should a Licensed Insolvency Trustee (LIT) become involved?

If no available loan leaves a workable budget, or you cannot meet your debts when payments are due, an LIT assessment may help before you commit more home equity. You do not need to wait until every borrowing option has been exhausted to discuss the debts.

The important distinction is between housing costs you can afford once other debts are addressed and housing costs you cannot carry even then. A trustee considers the household budget, debts and assets together. A consumer proposal is one option for dealing with unsecured debt. Whether it is available and what it would require depend on that assessment. Equity in the home matters; a proposal is not a promise that a homeowner can keep the property on any terms.

Read Mortgages and a Consumer Proposal: Renewing, Refinancing, and Buying a Home for the existing mortgage and proposal questions.

Four situations can lead to different advice

• The home is affordable, but other debt payments are not. Unsecured debt has overwhelmed an otherwise workable housing budget. An LIT can assess whether addressing those debts could make the whole budget sustainable.
• A mortgage could work with affordable payments and a realistic repayment plan. A broker finds financing the household can carry. That may be an ordinary mortgage or a costly, short-term private loan with a realistic plan to repay it through a sale or refinancing. A formal insolvency proceeding may not be needed.
• Another mortgage would only postpone the shortfall. If the debt is growing and there is no workable repayment plan, further borrowing may make the position worse.
• One property deal has gone wrong, while other debts remain manageable. A lawyer-led settlement may be the appropriate route. See the pre-construction closing report.

What to bring to your next conversation

Bring your debt list, mortgage statements, proposed financing terms and household budget. Ask your mortgage broker to show what the loan pays off, every cost, the new payment and how the remaining balance will be repaid.

If the figures still do not work, contact Paul Franchi, Licensed Insolvency Trustee, to discuss your debts and options. You can also explore the Mortgage Trouble guides for renewal problems, missed payments and the decision to sell.