Best Debt Consolidation Loans in Canada
Securing equity in your home offers options for consolidating your debt that will save you money on interest and may even increase your cash flow. Reducing debt is always a smart decision, especially if you have large amounts of unsecured or high-interest debt. Fortunately, having equity in your home can allow you to consolidate or restructure your debt through a home-equity loan or through a second mortgage.
With the second mortgage option, you are able to use up to 90% of your home’s current market value to secure either another mortgage. The amount you are able to borrow for a second mortgage is tied to the amount of equity that you currently possess. If, for instance, you have 45% equity you can generally borrow as much as 40% of that equity. (Note: generally, you will not be able to borrow the full amount of the equity you have built.)
If your loan is up for maturity, another option is to take out a home equity loan. With a home equity loan, you can use up to 75% of your home’s current market value. With a home equity loan, you may choose to either take out a loan for 75% instead of the full mortgage, or you may choose to keep the terms of your current mortgage and take on an additional line of credit.
For those whose mortgage has not reached maturity, another possibility may be to keep your current mortgage rate and then borrow more money at the current interest rate. What will result is what is referred to as a weighted average. The availability of this type of loan is going to be restricted and will depend on the financial institution.
As with any loan, especially home loans, careful consideration should be given to the options and their impact on your current and financial solvency. Ratestead.ca offers a variety of tools and calculators to help you assess the options.
What is a debt consolidation loan?
If you have several outstanding loans and the interest payments every month are quite high, this is an option is to consolidate several loans into one.
So what exactly does this mean? It simply means putting together multiple loans into one loan. This reduces the overhead, financial charges on multiple loans and bring down the overall cost. Merging multiple loans into one is also known as Debt-Consolidation. Not only does this simplify your finances, but you can also use this method to pay off the higher interest loans in one go and cut down your average monthly payment.
Rates of Debt Consolidation Loans
One simple way to simplify the management of your debt would be to apply for debt consolidation loans. Most banks and financial institutions offer debt consolidation mortgages against security that does not have a loan on it. A relatively newer vehicle, other valuable assets like a boat, top-rated mutual funds or even vehicles like RV could qualify as security for this type of loan.
On average, banks and financial institutions tend to offer attractive rates for this kind of debt consolidation loan across Canada. As per records in the past decade, banks have charged interest rates between 7- 12% for this type of debt consolidation loan. The rates charged by finance companies, however, could vary between 14% to even 50% if the loan type is unsecured.
Types of Debt Consolidation Loans Canada:
There are a number of ways to use a mortgage to consolidate debt Canada.
You can refinance your mortgage, which requires you to technically break your mortgage and take another mortgage for up to 80% of your home’s value, based on Canadian rules. That requirements is more conservative than it used to be; there was a time when lenders would allow a homeowner to borrow up to 110% of the available equity in their homes. Now, though, to prevent another economic meltdown, they require Canada homeowners to keep at least 15-20%, which means, if you don’t have enough equity in your home, there can be no debt consolidation mortgage refinancing Canada. Again, since you are technically breaking your original mortgage, there is a penalty, as well. When refinancing, it is important to do so at the lowest possible rate, or there may be no point.
Another option is what is called a Home Equity Line of Credit, or HELOC, which is also usually maxed out at 80% of your home’s equity. In almost all cases, a HELOC is a variable-rate mortgage and carries a slightly higher rate. This is a line of credit, which means you are not simply advanced all of the money at once; you get to decide how much or how little you want to use as you need to use it. In other words, they work like credit accounts, but with much lower rates.
Another possible advantage to HELOCs is that they tend to only require interest-only payments for a time. There are fees associated with a HELOC, but if you add a HELOC to your first mortgage, you can avoid refinancing penalties.
A Debt Consolidation Mortgage is Not for Everyone:
While the idea of a debt consolidation mortgage is a great idea on paper, they are not right for everyone with a home. Economic experts are quick to remind homeowners that the purpose of debt consolidation is to reduce debt, which means you should only do it when you absolutely have to. It’s recommended that people treat their home equity as a generally untouchable savings account and to only take out the money when they absolutely need it.
Also, once a homeowner gets a debt consolidation mortgage, they should commit to changing the habits that put them into such debt in the first place. That said, a debt consolidation mortgage has other benefits, as well. For example, credit card debt can make it more difficult to qualify for a debt consolidation mortgage because they may not meet the lender’s debt-to-income ratio requirement, or DTI, which is a fancy way of saying their monthly debt may be considered too high compared with their income. On balance, for those with a lot of unsecured debt, like credit card debt, a debt consolidation mortgage can be a life saver.
Using a Broker for a Debt Consolidation Mortgage Canada:
The main reason for getting a debt consolidation mortgage is to reduce debt and save money, so getting the best mortgage rate and the best terms possible is very important. An experienced and knowledgeable mortgage broker Canada can make a huge difference and save you a lot of money. And because they know a lot about the market and your situation, they can help you deal with all of the potential problems and pitfalls to make everything easier and more financially beneficial for you. A debt consolidation mortgage Canada can make your life easier, but only if you get the one that fits your life.
Advantages of Debt Consolidation
You might wonder, does it make sense to apply for debt consolidation loans or consolidate all your loans into one?
- It is one simple step to cut down higher interest payments;
- You can easily pay off higher interest loans and settle for one with a lower payout;
- Your monthly finances get simplified instantly
- Related service and finance charges are also lower as this will now pertain to only one loan amount
- You get a distinctive timeline to pay off all your financial liability without any additional charges.
- It is a fact of modern life that everyone carries debt. And sometimes, circumstances lead to that debt becoming overwhelming. However, many homeowners don’t realize that they have a solution, and they’re living in it. In your home is the means to combine all of your unsecured, high-interest debt into a single debt consolidation mortgage with a much lower interest rate and better terms.
- There can be a number of advantages to such a mortgage, but the best one is the ability to pay down formerly high-interest debt over a longer period of time in one single loan payment, instead of making multiple payments that often don’t even reduce the principle. For people with a lot of unsecured debt, like credit card debt, the ability to combine everything into one monthly payment that easily fits into your budget can be a major relief.
One reason such a mortgage is possible is that mortgages are backed by the collateral of your home, which means they carry less risk, as far as your lender is concerned. The lower the risk, the less interest you have to pay. And for you, in addition to only having to make one lower payment, consolidating multiple debts into one will significantly improve your credit score by eliminating many individual debts on paper, saving you even more money in the future by increasing your options.
Disadvantages of Debt Consolidation
There are some disadvantages that you must remember before applying for debt consolidation:
- Most of these types of loans require security or collateral
- Individuals applying for this kind of loans must have a reasonable credit score
- The interest rate is higher than regular home refinancing loans
- For unsecured debt consolidation loans, rates can be relatively higher
Do you want to start simplifying debt management and hopefully bring down interest rates? Check out our best rates for debt consolidation loans .