With the rising cost of living in Canada and the increasing ease of accessing credit cards and loans, it is easy to see how so many people are falling into debt. If your debt becomes unmanageable, you may begin to think about debt consolidation.
Debts consolidation involves using one loan to pay off many debts over a specific term period. This involves combining multiple loans into one loan to pay towards all your debt every month. You can take a debt consolidation mortgage in all parts of Canada, as explained in our reviews of such deals in Edmonton, Toronto, Calgary, and also BC, Alberta, and Ontario.
Table of Contents
- What is a Debt Consolidation Mortgage?
- What to Consider When Debt Consolidating Your Mortgage
- 5-Year Variable Mortgage Rates
- What Are 5-Year Fixed Mortgage Rates?
- How Much Can I Save Comparing 5-Year Variable Rates?
- What are the Pros and Cons of Variable Rates?
- The Bottom Line
What is a Debt Consolidation Mortgage?
A debt consolidation mortgage involves taking out a loan using the available equity in your property. Your home equity is the difference between the amount you still owe on your mortgage and the value of your property.
A debt consolidation mortgage allows you to release some of the cash that you have already paid towards your home. You can then use it to consolidate your other debts. This could simplify your finances and reduce the interest that you are paying on your current debt.
Some examples of loans you can consolidate include:
- credit card debt
- overdraft balances
- tax debt
- retail store cards
- child support debt
- any other debt you owe
Consolidating smaller debts is an excellent way of keeping track of your finances. Typically, a debt consolidation loan can help you pay off your debt at a faster rate. This is because you will usually pay a lower interest rate.
Your debt should also be easier to understand and manage as you will only have to make your monthly payments to one lender.
What to Consider When Debt Consolidating Your Mortgage
If you are considering consolidating your debt into your current mortgage or a new mortgage, there are some important things to consider.
One of the main benefits of consolidating your debts is that you can choose an option that has a lower rate of interest than your current debts. Higher interest debt takes much longer to pay off as less of your monthly payment pays off the balance. By reducing your interest, you have the option to reduce your monthly payments or clear your debt balance faster.
The Amount of Debt Consolidation Loan
When consolidating debts into one big loan, you must make sure it covers all of your current debt. This is so you are only making one, simpler monthly payment and do not have multiple high-interest debts.
Using an online debt calculator can help you identify whether consolidating debt is the best option for you. They consider your debt balance, debt interest rate, and the monthly payment you could afford. A debt consolidation calculator might make several recommendations for consolidating your debt. You can then choose the option that works best for you.
Different Solutions for Debt Consolidation
The following alternatives to debt consolidation mortgages can also help with consolidating debt:
- Home equity loan
- Equity line of credit
- Credit card balance transfer
- Loans from friends or family
To be eligible for debt consolidation, you may need to have a good credit score. If you currently have a lot of unpaid credit card debt and outstanding loans, you may find that your credit score has dropped and you are now considered to have bad credit. In Canada, credit scores range from 300-900. Only those with a score above 650 are rated as having a good score. Anyone with a score lower than this may be rejected from taking new credit.
It May Be Possible to End Up With More Debt
Debt consolidation can lead to more debt if you are not careful with your finances. Avoid spending too much on the accounts that you have paid off. Ensure you make your monthly payments on time, or you may find your debt begins to accumulate. Try to avoid using your credit card or take out a new loan while paying off your existing debt.
You have three credit cards and owe a total of $20,000, with a standard interest rate of 20% and a loan term length of 24 months. If you plan to pay all these credit cards off separately, you will pay $1,017.92 per month. By the time the term has finished, you would have paid $4,430.08 for your interest debt and $24,430.08 overall. This is presuming that you make every monthly payment on time. Every time you make a late payment, a charge will be added to your account, and you may accrue more debt.
With a debt consolidation loan, you could save money in this situation. Firstly, you would need to get a lower interest rate, for example, 11%, with the consolidating debt loan. This would involve a monthly payment of $932.16 per month. When the term has finished, you would have paid $2,371.84 towards the interest and $22,371.84 overall. Therefore, if you consolidate your debt in this scenario, you would save $2,058.24.
It is also possible to consolidate debt with an even lower interest rate. This would result in your overall payment amount being lowe.
5-Year Variable Mortgage Rates
The 5-year mortgage rate for TD Bank is 0.55% and 1.90% variable.
TD Bank offers the following benefits with closed-term mortgages:
- During each calendar year, you can increase regular payments by 100% once with no charge.
- Without charge, you can prepay 15% of your original mortgage amount.
The closed-term option with TD Bank is the best if you want to pay off your mortgage at a steady rate. When you consolidate debt, the overall mortgage amount and interest payments will not change. A closed term mortgage usually has a lower interest than other types of mortgages. This allows you to pay off your debt faster.
Furthermore, the current prime rate of TD Bank will determine how much of your monthly payment goes towards interest or the actual mortgage. An increase in the prime rate will lead to you paying more towards your interest debt. But, if the prime rate decreases, you will pay more towards the current mortgage balance.
If you were interested in an open term mortgage, TD Bank offers the following benefits:
- Increase payments without charge, once per year.
- You are allowed to make prepayments at any time, full or partial.
The open-term option with TD Bank is suitable if you wish to pay off your current mortgage faster. Through debt consolidation, you can increase the amount of your monthly payment. By making more significant payments, you will also reduce your interest debt.
The 5-year mortgage prime rate for Scotiabank is 0.6% and 1.85% variable.
Scotiabank offers the following benefits with the closed-term mortgages:
- Interest rates are reset when the prime rate changes.
- Convert your 5-year variable mortgage rate to a fixed-term rate with no charge.
- Pay your mortgage off faster with prepayment options. You can prepay 15% of your mortgage.
- Make extra regular payments on existing regular payments.
- You are allowed to miss payments, as long as you are up to date with payments in the term.
A closed term is a good option if you want debt consolidation with minimal interest debts. In the long term, it can help you to save money.
Scotiabank offers the following benefits with open-term mortgages:
- Low-interest rates for payments are calculated when the prime rate changes. This may prevent your interest debts from rising.
- No prepayment charges, so you can make additional payments at any time.
- Conversion to a fixed-term contract with no charge.
The open-term mortgage allows you to have flexibility with your repayments. It is very suitable if you want to pay off your current mortgage or quickly pay off any loan or credit card debts.
The 5-year mortgage prime rate for Motusbank is 0.46% and 1.99% variable.
Motusbank offers the following features on a variable mortgage rate:
- As the prime rate changes, the interest rate will also change.
- The amount of the total mortgage is fixed.
- A decrease in prime rate equates to a decrease in interest debt. This means more of your payment will go towards paying off your mortgage balance.
- An increase in prime rate equates to an increase of interest debt and less payment going towards the current mortgage balance.
The following will apply for the open-term mortgage:
- You can prepay as much of the mortgage as you want with no charge.
- A high-interest rate due to increased flexibility with payments.
The open-term mortgage may be suitable if you already have the funding needed to pay off the current mortgage. This means you can use debt consolidation to lower the total cost, allowing you to clear your debt more quickly.
The following will apply for closed-term mortgages:
- It can be prepaid but has a prepayment charge.
- You are allowed to prepay 20% of the mortgage amount per year.
- A low-interest rate.
Closed-term mortgages are a less risky way of paying your mortgage. You will pay a regular monthly payment as part of the term. Therefore, you are less likely to rely on the available line of credit or incur any debts on your credit cards. If you decide to consolidate your debt so that you are paying less every month, a closed-term mortgage may be the best option.
The 5-year mortgage prime rate for First National is 0.35% and 2.10% variable. In contrast to the other companies, First National is not a bank. However, it is one of Canada’s biggest lenders. This company only deals with mortgages; therefore, debt consolidation is one of its few specialties.
Here are some features for a variable mortgage rate with First National:
- The prime rate dictates whether more payment goes towards the current mortgage or interest.
- An increase in the prime rate means you will pay more interest and less principal.
- A decrease in the prime rate means you will pay less interest and more principal.
- It can be converted to a fixed-term mortgage.
- The prime rate is similar to the big banks in Canada.
Compared to the other companies, First National has a low prime rate. This means it has the potential to offer lower interest rates. If you are consolidating debt for the first time with a new mortgage, this is suitable as you are reducing the amount of risk.
If you are using your current mortgage or taking a second mortgage for your home, the lower interest rates can make sure you do not use your line of credit. A line of credit may have high interest attached. Additionally, some people are not offered a line of credit, so consolidating their debt into their mortgage may be the best option for them.
The 5-year mortgage prime rate for MCAP is 0.4% and 2.05% variable.
This is one of the biggest lending organizations in Canada, and it specializes in home mortgages. MCAP offers an online mortgage calculator, which is very helpful if you are looking for a new mortgage.
Here are some features for a variable mortgage rate with MCAP:
- Payments are based on the prime rate.
- Able to convert your mortgage to fixed-term at any time without charge.
Based on its relatively low prime rate, MCAP can provide low interest for a home mortgage loan. Therefore, you have less chance of accumulating debt from a new mortgage. Furthermore, with debt consolidation, you will be able to take advantage of the interest rate. This is because you can simultaneously pay off any other loans more easily.
What Are 5-Year Fixed Mortgage Rates?
This is a type of home mortgage where you pay monthly payments for five consecutive years. During this time, the rate of interest does not change. For example, if you agree on 10%, you will have to pay 10% interest until the term ends.
After five years, you will have to renew your mortgage term as a five-year fixed mortgage does not represent the full length of your home mortgage. The full time-span of the mortgage is known as the amortization period. For example, for a 30 year amortization period, you would have to renew your terms six times.
It is not easy to be accepted for five-year fixed mortgage rates as you need to meet the lender’s standards of approval. If lenders do not view you as a low-risk candidate, you may be offered higher interest to compensate for this. Alternatively, you may not be refused a home mortgage altogether.
However, your rate of interest can change after a five year fixed term is completed. For example, If you keep up to date with payments, your term could go from high interest to low.
For consolidating debt, five-year fixed terms are a good option. You will pay the same rate of interest for your debts. For example, your credit card debt, equity loan, or even a second mortgage will have the same interest. This is beneficial if the rate of interest for your previous debts was higher, as you may reduce the total amount that you pay.
How Much Can I Save Comparing 5-Year Variable Rates?
By comparing rates, you can save a lot of money on a new mortgage. Taking out a new mortgage or consolidating your debts into your mortgage is a big decision. You should, therefore, do everything you can to find the best deal.
A new mortgage with high interest will reduce the chance of you adding to your savings. High interest may lead to more debt and more reliance on your credit card or another loan to cover your living expenses. You should compare as many five-year variable rates as possible if you want to save money on your home.
When comparing rates, you should look for low-interest options. This is the key to saving a substantial amount of money on your home. Furthermore, a debt consolidation loan with low interest will make it easier to pay off your debt. Most loan options from banks will be quite similar. However, small percentage differences have a big effect on your finances.
Here is an example of how you can save money by comparing five year-variable rates:
Your mortgage costs $600,000 and has an amortization period of 20 years. After a down payment of $35,000, you are left to pay $587,600. On a 5-year term with a high interest of 2.05%, you would pay $2984 monthly. When the term finishes, you would have paid $179,040 in total. Whereas, a 5-year term with a slightly lower interest of 1.60%, you would pay $2861 monthly. This would incur a total of $171.660 in total.
Therefore, you would save a total of $7380 on the term with less interest.
What are the Pros and Cons of Variable Rates?
The biggest positive about variable rates is their flexibility. You can increase your monthly payments, which may allow you to pay off your mortgage faster. This incurs no penalties, so you can make as many additional payments as you want. Furthermore, you can change to a different lender if you are paying high interest. This is a great option as you could switch to a lower rate of interest. Therefore, the amount you need to pay back may be less.
If you decide to stay with the same lender for five years, there is a chance the prime rate will decrease during lengthy periods. This means you will pay significantly less towards your home mortgage during this time. Within this period, you can make a good amount of savings, which you can later invest in your home or paying off other debt.
In terms of debt consolidation, a variable rate will make it easier to consolidate all your debt under one mortgage in the first place. This is because most variable terms start at a low rate of interest. So even if you are not in the best financial position, you have a greater chance of being able to afford a home mortgage.
A huge negative of variable rates is the lack of security with your payments. The prime rate determines how much you will pay monthly. If this increases, you will have to pay more towards your home mortgage. If you are not in a financially stable position or do not have much expendable income, this can have serious consequences.
If you cannot keep up with your monthly repayments, you might lose your home. This will also have a negative impact on your credit score. It will then be much more difficult for you to apply for a debt consolidation loan or a home mortgage in the future. Choosing to consolidate your debt with a variable term can be a risky strategy if you are not responsible with your finances.
Furthermore, the lack of stability in a variable term will make it difficult for you to plan your payments. If you have long-term financial goals or are planning a second mortgage, this can be very inconvenient. Your monthly payments can vary, which will make it hard for you to predict your budget. A variable term may not be suitable for everyone who is looking to consolidate their debts and make savings every month.
The Bottom Line
Debt consolidation mortgages can be a great way of paying off your high-interest debts and reducing your credit card balance. However, before consolidating all your debts into one loan, consider the risks. There is the chance that you can end up with more debt or lose your home entirely.
There are many home mortgage providers in Canada, so you must do your research to find the best loan. By carefully comparing mortgages, you can save money and make the best of debt consolidation. Choosing a provider with lower interest will result in lower monthly payments. This makes it easier to pay off your debt long-term.
Once you have found a suitable provider, you need to decide whether you want a fixed-term or variable term mortgage. Both will provide you with the loan that you need, but there are many pros and cons associated with both.
If you already have a large amount of debt, a variable-term loan may not be suitable. This is because you need to have some breathing room to make your payments every month. Therefore, a fixed-term mortgage will be more suitable to pay off your debt. However, if you have minimal debt, a variable-term loan could be better. You can make additional payments every month to clear the debt of your home mortgage more quickly.