Refinancing Your Home to Consolidate Debt in Ontario

If you are carrying credit card balances, a tax bill or other debts, rolling them into your mortgage can look attractive. One payment, and often a lower interest rate than a credit card.

But the trade is serious. Debts that were not tied to your house become debts secured on it. This article explains how it generally works in Ontario, what limits apply, and what to weigh before you sign.

How debt consolidation through your home works

There are two common routes. You can refinance, which replaces your current mortgage with a larger one and uses the extra money to pay off other debts. Or you can borrow against your equity without replacing the first mortgage, for example with a second mortgage.

A second mortgage is a second loan secured on your home. You must keep paying the first mortgage too, and second-mortgage interest rates are usually higher because they are riskier for lenders.

How much can you borrow?

When borrowing against home equity, you can usually borrow up to 80% of your home's value, minus what you still owe. The lender will also look at your income and credit, so being allowed to borrow is different from being able to afford it.

As a simple way to picture it, take 80% of your home's value and subtract what you still owe on your mortgage. What is left is the room you may have to borrow. Your lender's own calculations may differ.

If you are 55 or older, a reverse mortgage is a different product. It usually allows borrowing generally up to 55% of the home's current value, the interest is added to the loan so the balance grows, and the loan comes due when you sell, move out, the last borrower dies, or you default.

The risks to weigh

• Your home is the security. If you cannot repay, you may lose it through foreclosure. How this compares with your other debts depends on your situation, so it is worth confirming with a lawyer or accountant before you move them onto your home.
• Breaking your current mortgage can cost money. The penalty is usually the higher of three months' interest on what you owe or the interest rate differential.
• A second mortgage ranks behind the first. Under the Land Titles Act, charges rank in the order they are entered in the register, so a second charge ranks behind an earlier first charge. A postponement registered under subsection 78(6) can change that order.
• Longer repayment can cost more. Spreading a short-term debt over a long amortization may mean paying more interest in total, even at a lower rate.
• Debt can come back. If the cards are paid off but spending habits or income problems remain, you may end up with both the larger mortgage and new card balances.

Choosing a lender or broker carefully

If your credit is strained, a private lender may be the only option. Private mortgages are generally a short-term option, often for one or two years. They are often interest-only, fees are often higher than for a traditional mortgage, and private lenders may charge fees for late payments, lapsed insurance or property upkeep. You should have an exit strategy and consider independent legal advice before signing.

Mortgage brokerages, brokers, agents and administrators in Ontario are licensed by FSRA under the Mortgage Brokerages, Lenders and Administrators Act, 2006, and you can check a licence on FSRA's public listing. You may not be protected if you deal with unlicensed people.

A brokerage must take reasonable steps to make sure any mortgage it presents is suitable for your needs and circumstances. It must disclose material risks in writing, its relationship with each lender and any conflict of interest, and it must get your written acknowledgement. These disclosures must be made no later than two business days before you sign the mortgage agreement.

Be wary of any loan with an extremely high cost of borrowing. It is a criminal offence to enter into or receive interest at a criminal rate, an annual percentage rate above 35 per cent. Certain commercial loans to borrowers who are not natural persons are exempt.

Credit card debt, tax debt and what to do next

Credit card debt and tax debt are not the same. Whether your tax debt can be paid from mortgage money, and whether other options exist, depends on the facts, so confirm the details with an accountant or a lawyer. Do not pay off a debt until you have the payout figure in writing.

• List every debt with its balance, rate and monthly payment.
• Get your home's likely value and your current mortgage balance.
• Ask your lender for the exact penalty to break the current mortgage.
• Compare the total cost, not only the monthly payment.
• Check that any broker or agent is licensed on FSRA's public listing.
• Have a lawyer review the new mortgage before you sign.

Frequently asked questions