Mortgaging your home to consolidate your debts

Your house value has been rising in recent years. You’ve got debts and are wondering if the time is right to consolidate them by refinancing your mortgage or taking out a mortgage line of credit. This may seem like good solutions initially, but they do comprise several dangers.

In short

Opting for a mortgage consolidation to settle your debts seems to be a good solution at first glance. But it is not without risks.

Interest is still high since you are paying your debt at a lower rate but over a longer period. Furthermore, interest rates are expected to rise in the coming months.
The risk of falling back: You might have a false sense of security and start spending again and using your credit cards. You’ll only be making your situation worse. If you default, you may even lose your home.
Fix the problem at the source: to settle your debts once and for all, you have to change your financial habits and get help as needed. This will free you from the debt spiral for good.

Mortgage consolidation: is it really a good idea?

Refinancing your property or taking out a mortgage line of credit linked to your mortgage in order to consolidate your debts may seem like a good solution to debt problems at first glance. The objective is to make smaller monthly payments and pay less interest. Once your application is accepted, the bank will pay off all your high-interest debts (personal loans, credit cards, car loans, etc.) as well as the balance of the mortgage and transfer it all to a new mortgage or a mortgage line of credit at a much lower rate.

The cost of debt consolidation

Start

Interest is still high

Even though mortgage consolidation reduces the interest you pay, it is still high because, while you’ll be paying off your debt at a lower rate, it will be over a much longer period of time. Also, since rates are expected to rise in the coming months, your monthly payments will be higher. Will you have the budget to continue paying them? If not, you risk falling back into the same cycle of debt.

A last resort

Unless you can minimize your unnecessary expenses and maximize your monthly payments to reduce your interest, there are more dangers than benefits to mortgage consolidation. For many experts, it’s a last resort. Not only that, if you default, you could lose your home.

Fix the problem at the source

If you want to get out of debt for good, the real solution is to understand the reasons why you got into debt in the first place so that it doesn’t happen again. You need to start by changing your financial habits, including:

Setting a budget to control your income and expenses;
Using your credit cards only when absolutely necessary and paying the full amount each month;
Avoiding impulse buying.

When you live within your means, you’ll slowly get rid of your financial burden.

In short, rather than opting for mortgage consolidation, it’s better to choose a permanent solution to your debt problems. By fixing the problem at the source, that is, by changing your consumption and financial management habits, you’ll get out of the debt spiral for good. If necessary, call on professionals like those at Raymond Chabot!

Do you want to be debt-free once and or all? Don’t hesitate to call on our financial recovery counsellors, they can help you find solutions.