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Everything You Need To Know About Debt Consolidation Mortgage Loans In Ontario
What is a debt consolidation mortgage loan?
Consolidate debt with home equity
A debt consolidation mortgage is a type of mortgage where home owners with substantial debt (usually minimum of $20,000) use the equity in their home to pay off high interest creditors. This can be done in the form of a mortgage refinance, home equity line of credit, second mortgage, private mortgage or home equity loan. A debt consolidation mortgage is a mortgage solution many home owners often find to be a valid solution debt relief, improve monthly cashflow, and improve their credit score.
How does a debt consolidation mortgage loan work?
How to consolidate your debt with a mortgage
Home owners can consolidate their secured and unsecured debt, which carry high interest rates, usually 19% and up, using the equity available in their home. To consolidate into a mortgage, a home owner needs to access the equity (money) built into their property, in the form of a mortgage refinance, or second mortgage, also known as a home equity loan, to pay off the existing creditors. Traditionally, banks offer balance transfer solutions for unsecured debt, and a debt consolidation mortgage works the same way — simply transfer high interest debt, into lower interest debt to pay off the principal mortgage balance faster.
There are various factors taken into consideration to determine which option to consider, including the maturity date of the existing mortgage(s), penalty for breaking existing mortgage(s), the borrower’s qualifications and more.
Debt Consolidation With Mortgage Refinancing or HELOC
Refinance your mortgage to pay off debt
One method to consolidate debt with a mortgage is to consider a mortgage refinance option. Using mortgage refinancing to consolidate debt requires the existing mortgage(s) registered on the property to be discharged, and if a borrower has a closed mortgage term, they will incur a penalty for breaking the mortgage during the term. Considering there is a penalty for debt consolidation with mortgage refinancing, this option should be compared to the cost of the second option — getting a second mortgage.
To consolidate debt with refinancing the borrower(s) would also require to qualify with income and credit requirements, as per new lender/bank’s lending criteria. Bank and institutional lenders will refinance a mortgage up to a maximum 80% loan to value (LTV).
Consolidate Debt With a Second Mortgage or Home Equity Loan
Debt consolidation with a second mortgage
Using a second mortgage for debt consolidation, the home owner(s) aren’t required to break their first mortgage, and therefore will not incur any early repayment penalties.
In some cases where home owners have sufficient equity, the borrower(s) may have the option to access additional equity to prepay the mortgage payments in advance, using the mortgage proceeds. The lender would register a higher loan amount on the property for the total monthly payments for the term, and will be paid this amount at the time of payout. The standard term for a second mortgage or private mortgage for debt consolidation is 1 year, with interest only payments, therefore no amortization, and no principal is paid during the term.
Debt Consolidation Loan With Second Mortgage Requirements
Second mortgage debt consolidation requirements
Debt consolidation with a second mortgage does not have traditional income or credit qualifications, as the approval is based on the equity in the home. Second mortgage debt consolidation loans do not have standard debt servicing ratio qualifications as institutional mortgages. The only requirements is usually an appraisal confirming the property value, marketability and condition of the property, for the lender to make a final decision and fund the loan.
In some cases where home owners have sufficient equity, the borrower(s) may have the option to access additional equity to prepay the mortgage payments in advance, using the mortgage proceeds. The lender would register a higher loan amount on the property for the total monthly payments for the term, and will be paid this amount at the time of payout. The standard term for a second mortgage or private mortgage for debt consolidation is 1 year, with interest only payments, therefore no amortization, and no principal is paid during the term