Canadian mortgage rates may be higher than homeowners became accustomed to a few years ago, but that doesn’t necessarily mean refinancing your mortgage is a bad idea. If you are carrying credit card balances, lines of credit, vehicle loans or other high-interest debt, a mortgage refinance for debt consolidation could significantly reduce your monthly payments and improve cash flow.
The question isn’t simply, “What mortgage rate can I get?” A better question may be, “What is all of my debt costing me?”
Compare Your Mortgage Rate to Your Credit Card Rate
Mortgages are generally one of the lowest-cost forms of borrowing available to Canadian homeowners because the loan is secured by real estate. Credit cards, by comparison, commonly carry interest rates of around 20% or higher.
For example, consider a homeowner with a $400,000 mortgage at 5% who is also carrying $40,000 in credit card debt at 20%. The mortgage rate may seem high compared with rates from several years ago, but the credit card debt is far more expensive. A $40,000 balance at 20% could generate ~$9,600 in interest over a year if the balance remained outstanding.
Using available home equity to consolidate eligible high-interest debt into a mortgage at a substantially lower rate would make a significant difference. That same $40,000 amortized at a mortgage rate could save you ~$6,900 in interest costs alone.
Reduce Monthly Payments Through Mortgage Refinancing
One of the biggest reasons Canadians consider refinancing a mortgage to pay off debt is to reduce monthly payments.
Credit cards, personal loans and lines of credit can consume a large portion of monthly household income. By consolidating these debts into a mortgage and spreading repayment over a longer period, homeowners may be able to substantially reduce their required monthly payments.
The result can be improved cash flow, less financial pressure and more room in the monthly budget.
Is Debt Consolidation Through Your Mortgage Right for You?
Mortgage refinancing is not automatically the right solution for everyone. Your available home equity, current mortgage balance, prepayment penalty, qualification requirements, legal or appraisal costs and new mortgage rate should all be considered.
It is also important to remember that reducing your monthly payment does not always mean reducing your total borrowing cost. Extending debt over a longer amortization can result in more interest being paid over time. That is why the overall refinance strategy matters.
Consider the Cost of All Your Debt
Waiting for mortgage rates to drop while continuing to carry credit card debt at 20% or more may ultimately cost considerably more.
If you own a home and have built up equity, now may be a good time to explore whether a debt consolidation mortgage or mortgage refinance could reduce your monthly payments and put you in a stronger financial position.
At Countryside Financial, we can review your mortgage, home equity and existing debts to determine whether refinancing makes sense for you.
