Debt consolidation refinance
Roll high-interest cards and lines of credit into your mortgage rate. Compare what you pay each month now vs after the refinance.
Your scenario
Result
Only works long-term if the cards stay closed. Otherwise you'll add the cards back AND have a larger mortgage.
Debt consolidation refinance — the math
Rolling high-interest debt (credit cards at 20%+, unsecured lines of credit at 8-12%) into your mortgage at 5% can save thousands per year in interest charges. The mechanic: refinance your mortgage upward and use the new proceeds to pay off the high-interest accounts.
What it saves
- $30,000 of credit card debt at 22% generates $6,600/year in interest
- Same $30,000 added to a mortgage at 5% generates $1,500/year in interest
- Annual interest savings: $5,100/year
- Lower monthly debt service freed up for other use
The 80% LTV cap
Canadian refinances cap at 80% loan-to-value. If your home is worth $900,000 with a $540,000 first mortgage, you can refinance up to $720,000 — pulling out a maximum of $180,000 to consolidate other debt. Above the 80% LTV cap, you'd need a HELOC (which itself caps at 65%) or alternative lending.
Costs to consider
- Discharge fee (if changing lenders): $200-$400
- Legal fees: $1,500-$2,500
- Possible appraisal: $300-$500
- Prepayment penalty on existing mortgage (if mid-term): variable
- Stress test re-qualification at new higher mortgage
The discipline requirement
Consolidation works long-term ONLY if the high-interest accounts stay closed. The classic failure mode: cards get paid off, cards stay open, 6 months later they're back at max balance — now you have BOTH the cards AND a larger mortgage.
Best practice: close the cards as a condition of the consolidation. Build a small ($3-5k) emergency fund in a savings account so emergencies don't need cards. Keep ONE card open for online purchases / car rentals / etc., with a low limit.
When NOT to consolidate
- You can't commit to keeping the cards closed — you'll just add them back
- You might sell within 12 months — closing costs don't amortize
- Your credit is bad enough that refinancing requires expensive private money
- Your existing mortgage has a punishing IRD penalty for mid-term break
Tax implications
The interest portion of the consolidated mortgage that's attributable to refinanced personal debt is NOT tax-deductible. If you're consolidating debt that was originally used for income generation (investment loan, rental property capex), keep careful records — that interest may remain deductible.
Related
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