If you’ve got debts to pay off and are struggling to manage them, you might want to consider debt consolidation.
Debt consolidation can be an effective method of making your debt repayment easier to manage, and is basically the paying off of smaller loans, with a larger one. The large loan enables you to pay your smaller loans in one go, and ideally with a more favorable interest rate than your other loans, making it both quicker, and cheaper to repay.
Using your mortgage to consolidate your debt
There are a number of different ways to consolidate your debts, but if you own a home in Canada, you can use a mortgage to do so.
Being smart about consolidation
Consolidation is a great idea, provided you have a payment plan in place that you’re able to stick to, and there are a few other things to consider, too:
- • Your debt consolidation loan should have a lower interest rate
Repayment should be made easier with debt consolidation, and not make you struggle even more than you already were, and many people find it helpful to consult with a financial advisor, to be sure they get the interest rate, fees and duration they want.
- • Pay above the minimum monthly fee
Doing this whenever you can, enables you to make your payments faster and easier, and helps you to stay afloat should you be faced with any challenges to your income.
The different ways you can consolidate your debt
As mentioned previously, there are several ways to consolidate your debt, and using your mortgage is just one of them:
- • Mortgage refinance – using your existing mortgage to consolidate your debt can be a good idea, but it does involve breaking your current mortgage early, which typically comes at a cost in the form of a penalty.
Refinancing your home mortgage enables you to access 80% of your home’s value once the remaining mortgage has been deducted, and with that sum, you could combine your mortgage and any other amounts into a single debt.
• Use your first mortgage – it is possible to consolidate the amount you owe with your first mortgage, but you will likely be under intense scrutiny from your lender.
• Home equity loan – with a home equity loan, you can access the available equity in your home, and this can be calculated by removing your home’s current market value from the remaining amount you’ll pay as a balance. With your available equity, you can consolidate your owed amount and pay them all off at once.
• Debt consolidation loans– helping you to combine all of your loans into one, these are obtained by a credit union, bank, or similar financial institution. The rate you get for your loan depends upon your collateral, however, and using your home will help you get the lowest interest rate, along with a good credit score.
Using your mortgage to consolidate your debt can work for some homeowners, but it’s best to talk through the pros and cons of this with a mortgage broker, or financial adviser before making any decisions.