I make my living arranging these. I still talk people out of them fairly often, and it is worth writing down why.
When the spending has not been dealt with
If the debt built up because the money going out exceeds the money coming in, consolidation clears the symptom and leaves the cause. Six to eighteen months later the cards are full again, and now they sit on top of a larger mortgage.
This is the most common way it goes wrong and it is not about willpower. It is about arithmetic that has not changed.
When the penalty swallows the saving
Breaking a fixed mortgage mid-term can trigger an interest rate differential penalty running to several thousand dollars. If your renewal is within a year, waiting almost always wins, because at renewal you can restructure with no penalty at all.
I would rather tell you to come back in eight months than take a file today.
When there is not enough equity
Most lenders stop at 80 percent of your home’s value. If you are close to that already, there may be nothing to work with, and stretching to a second mortgage at a much higher rate to consolidate lower-rate debt is going backwards.
When the debt is nearly gone anyway
If you can clear it in 18 months on your own, do that. Refinancing costs legal fees, an appraisal, and possibly a penalty, and stretching a nearly-finished debt across 25 years is a poor trade for a modest monthly saving.
When bankruptcy or a consumer proposal is the honest answer
Sometimes the debt is simply larger than the equity and the income can carry. Draining your home’s equity to delay an outcome that arrives anyway leaves you with no house and the same problem.
That is a conversation for a licensed insolvency trustee, not for me, and I will say so and point you at one. It is not a comfortable thing to hear from someone whose job is arranging mortgages, and it is occasionally the right advice.
When you are separating
Not never, but not yet. Restructuring the mortgage before the separation agreement is settled can complicate the division of property. Get the legal side sorted first.
So when is it right?
When you have real equity, the debt is high-interest, the cause was a one-off rather than a pattern, and you have a plan for the freed-up cash flow. Then it is one of the most useful things available to a homeowner.
If you are not sure which of these you are, would it help to talk it through honestly before anyone runs an application?
General education, not financial advice. Figures are illustrative and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent Level 1, Lic. #M25003153. Dominion Lending Centres YBM Group, FSRA #11129. 705-881-2780 · lfenn@dominionlending.ca
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