Can You Consolidate Debt into a Mortgage?

Yes, you can consolidate debt into a mortgage in Canada. Homeowners typically combine high-interest debt—such as credit cards, personal loans, and other unsecured debts—into a mortgage product, reducing overall interest rates and monthly interest payments. However, it’s crucial to consider the long-term implications, as increasing your mortgage balance can impact your future finances.

In this guide, we’ll explore how mortgage debt consolidation works, its benefits and drawbacks, and key factors to consider before making a decision.

How Does Mortgage Debt Consolidation Work in Ontario?

Debt consolidation through a mortgage involves refinancing your existing mortgage to include outstanding debts or getting a home equity loan or a home equity line of credit (HELOC) to pay off debts.

Mortgage Refinancing

Refinance your current mortgage for a higher amount and use the extra funds to pay off high-interest debts.

Refinancing before your maturity could involve a prepayment penalty and banks require at least 20% equity in your home.

Home Equity Line of Credit (HELOC)

Get a revolving credit line secured against your home in second position behind your existing mortgage.

You borrow only what you need, similar to a credit card but with lower interest rates.

Banks typically requires good credit, income, and sufficient home equity.

Home Equity Loan

Get a loan using the equity in your home in second position behind your existing mortgage.

Home equity loans in second position has higher interest rates than a first mortgage but lower than unsecured debts.

Improve your cash flow and credit score.

Reverse Mortgage (For Seniors 55+)

Homeowners aged 55+ can access their home equity without monthly interest payments.

Useful for seniors or retirees with limited income but substantial home equity.

Is There a Debt Forgiveness Program in Canada?

Canada does not have a debt forgiveness program, but there are 2 legally binding debt relief options such as consumer proposals and bankruptcy to help reduce debts. A consumer proposal allows you to negotiate a partial debt repayment with creditors, while bankruptcy may discharge eligible debts. Debt relief programs have significant impact on your credit ratings for 6+ years and your ability to get financing in the future.

What Are The Disadvantages of a Consumer Proposal?

A consumer proposal can hurt your credit for up to six years, making future borrowing harder. Unlike using home equity, which keeps your credit intact, a proposal requires negotiating with creditors and might come with extra fees. Plus, it doesn’t cover secured debts like mortgages or car loans. If you have enough home equity, using it to pay off debt can be a smarter way to stay financially flexible.

Should You Consolidate Your Credit Card Debt?

You should always consolidate your credit card debt if you qualify for a lower interest rate through a mortgage, personal loan, or balance transfer. Consolidating your credit cards through a mortgage (i.e. home equity loan) is the most effective way to reduce your interest rate and interest payments. However, debt consolidation is not a mircale cure and you risk getting back into bad debt without addressing the underlying financial habits.

Does Debt Consolidation Affect Your Credit Score?

Debt consolidation through a mortgage usually requires a credit check and most of our clients see an improvement in their credit ratings after 60 to 90 days. Paying off unsecured credit card debt with your home equity is just the first step; reducing credit utilization, consistently making payments on time, and avoiding new bad debt will help you maintain your credit score in the long-run.

Pros and Cons of Consolidating Debt into a Mortgage

Pros of Debt Consolidation Through a Mortgage:

Lower Interest Rates – Mortgage rates are significantly lower than credit card rates (often below 6% compared to 20%+).

Improved Cash Flow – Mortgage products can have significantly lower payments than credit cards, personal loans, and auto loans.

Single Monthly Payment – Simplifies repayment by replacing multiple payments with one.

Potential Credit Score Boost – Paying off high-interest credit accounts can improve your credit utilization ratio.

Cons of Debt Consolidation Through a Mortgage:

Increased Mortgage Balance – Your total mortgage balance grows, potentially lengthening your repayment period.

Refinancing Costs – Legal fees, appraisal fees, and potential penalties for breaking your current mortgage can add costs.

Not a Long-Term Fix – Underlying spending habits must be addressed.

Is Mortgage Debt Consolidation Right for You?

Consider the following questions before proceeding:

Are you committed to avoiding new debt accumulation?

Do you have enough home equity to qualify?

Will the new mortgage payment be manageable?

If the answers are mostly “yes,” consolidating debt into your mortgage could be a strategic financial move.

Can You Consolidate Debt Into a HELOC?

Yes, you can use your equity to get a HELOC and use the HELOC to pay off your debt to reduce your interest rate and payments. HELOCs in 2nd position has a higher interest rate than your first mortgage but much lower rates than unsecured loans and credit cards. Since a HELOC is a revolving credit line, you can borrow and repay as needed. Consult a mortgage broker to get a product that's most suitable for you and your family.

Can You Consolidate Debt with Bad Credit?

Yes, debt consolidation can also help improve your credit score. You might not qualify for prime mortgage products but you might qualify with alternative lenders for refinancing and second mortgage products (i.e. HELOCs) that are designed to help homeowners get back on track. Adding a co-signer, including additional collateral, or improving your credit score before applying can help you secure better terms. Working with a mortgage broker can provide guidance and help you qualify with lenders willing to work with bad credit borrowers.

Can You Consolidate Debt Without a Job?

Yes, you can but your options might be limited as traditional lenders have strict debt-to-income requirements. Homeowners in Ontario can get a home equity loan to pay off their bad debt, improve their cash flow, and build up their credit until their situation gets better. Another option is a co-signer with stable income. Talk to a knowledgeable mortgage broker to fully explore your options.

Can You Consolidate Debt That Is in Collections?

Yes, debt in collections can be included in consolidation if you qualify for a refinancing or debt consolidation loan. However, prime mortgage lenders may view collections negatively depending on your circumstances. If consolidating is not an option, negotiating a settlement with creditors or exploring a Consumer Proposal may be viable alternatives.

Should You Consolidate Debt into Your Mortgage?

Debt consolidation through a mortgage can be a powerful tool for reducing high-interest debt and improving cash flow. However, it’s essential to weigh the risks and benefits carefully. Make sure you have a solid repayment plan and seek professional financial advice if needed.