Mortgaging your home to consolidate debt: what are the risks?

In today’s economic climate, where property values have significantly increased, mortgage consolidation may seem like an attractive option. However, this strategy carries significant risks and should be carefully assessed before proceeding.

Here’s why mortgaging your home to consolidate debt might end up costing more than you think.

In short: 

• Rolling your debts into a mortgage can reduce your monthly payments, but it often results in higher long-term costs and notable risks.
• It’s essential to compare all options, such as a consolidation loan, mortgage refinancing, and a consumer proposal, in order to understand the consequences of each and make an informed decision.
• Don’t focus only on the monthly payment, consider the total cost in interest of the chosen option.

What is mortgage consolidation?

Mortgage consolidation involves combining your personal debts (like credit cards or personal loans) into your existing mortgage.

In other words, you use the equity built up in your property to repay high-interest debts. You’re turning expensive debt into low-interest monthly mortgage payments, typically spread over a long period (25 years).

To better understand the actual impacts of this strategy, let’s look at a concrete example. Suppose someone owes $30,000, $20,000 on credit cards at 20% interest annually, and $10,000 on a personal loan at 11% interest. Here are 3 possible options:

1. Make only the minimum payments on the two existing debts.
2. Refinance with a consolidation loan at 12% to 14% interest, amortized over 5 years.
3. Consolidate everything into a mortgage at 4% interest, amortized over 25 years.

Scenario comparison

The risks of mortgaging your home to consolidate debt

• A more expensive long-term solution:
  Unless you commit to repaying the amount added to your mortgage faster through prepayments, this option can be more costly. Most mortgage contracts allow for prepayments of a certain percentage of the balance. Check your mortgage agreement or speak with your financial institution about your options. You might be surprised at how much you can save over the life of the mortgage.

• Your home is at risk:
  If you encounter difficulties making payments, you could lose your home.

• Limited financial freedom:
  Even if you don’t face financial hardship, extending your mortgage repayment delays financial independence and limits your retirement planning flexibility.

• The debt spiral:
  

  The significantly reduced monthly payments can create a false sense of “wealth” and lead to new debt if spending habits don’t change.

• Additional fees may apply:
  Refinancing a mortgage often comes with additional costs such as notary fees, appraisal fees, or early repayment penalties.

Mortgage consolidation: a double-edged sword

Consolidating debt through your mortgage might seem like a no-brainer, but it’s crucial to carefully calculate the total cost and consider the risks. Before turning short-term debts into long-term commitments, ask yourself: Have I really saved money… or just postponed the problem? Sometimes, if something seems too good to be true… it probably is.

Alternatives to consider before mortgaging your home

It’s often possible to consider other options, such as a consumer proposal, which can eliminate all interest charges and lower your monthly payments while allowing you to keep your home.

If you feel your current situation is unsustainable, don’t hesitate to consult a personal finance advisor for a personalized assessment and solutions better suited to your reality.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee