Who this is for: Homeowners with high-interest card, loan or line of credit balances and enough equity, who can afford the new payment and have a plan to clear the loan.
On this page
Most people reach for a consolidation loan on a bad night, after another statement shows the balance has barely moved. The idea is simple: borrow once against the home, pay off the cards and loans, and keep one payment instead of five. The arithmetic is less simple, and it deserves a slower look than the ad you clicked to get here.
What a consolidation second mortgage does
A second mortgage is a loan registered against your home behind your first mortgage. For consolidation, the lender sends the money straight to your card companies and lenders at closing, often through your lawyer, and you are left with one new loan. Your first mortgage stays exactly as it is.
The Financial Consumer Agency of Canada lists home equity loans and lines of credit among the ways to consolidate debt. It also lists the catches: consolidating into a lower-interest product can save money, but it can stretch the repayment out and raise the total interest you pay.
When it can make sense
A consolidation loan is easiest to defend when three things are true together. The interest on the debts you are paying off is clearly higher than the interest on the new loan, including every fee. The new payment fits your budget with room to spare. And you have a written plan for how the loan ends, whether that is a refinance with a bank once your credit recovers, a sale, or a payoff from a known lump sum.
It also helps when the debts are all unsecured and have no end in sight. A card balance that only receives minimum payments can sit for years. A short loan with a fixed date forces a decision, which some people find useful and some find frightening.
When it makes things worse
It makes things worse when the cards fill up again. The agency says plainly that keeping the same spending habits can rebuild the debt, and now you owe the new loan and the new card balances. It also makes things worse when the saving is small. The first worked example on this page shows a case where lower payments hide a first year that costs more than leaving the debt alone.
It is a poor fit when the problem is income rather than interest. If you could not afford the old payments because money stopped coming in, a loan that lowers the payment but ends in a year may only move the problem to a date when you have less room to solve it.
What it really costs
Read the two examples above line by line. The interest saving is real, and so are the lender fee, the broker fee, and the legal, appraisal and title costs. A second mortgage can be interest only, so the loan balance does not fall while you pay. At the end of the term the full amount is due, and if you need more time the lender may charge to extend it.
The same agency explains that a second mortgage usually carries a higher rate than a first mortgage because the lender takes more risk, and it lists appraisal, title search, title insurance and legal fees as costs you should expect. Ask for every one of them in writing, in dollars, before you agree. The calculator adds them up from a quote.
The risk you take on
Unsecured debt can hurt your credit and bring collection calls. Secured debt can cost you the home. The agency warns that if you cannot repay a second mortgage, you could face serious consequences including foreclosure. Turning card debt into debt secured on your house is a trade, and the lender is the one who gets the protection.
A second mortgage also sits behind your first. If the market falls, or you fall behind on either loan, both lenders have rights over the same home, and the first lender is paid first. Keep paying the first mortgage on time whatever happens with the second.
Options to look at first
If the debt is mostly on cards, call each card company and ask about a hardship or payment plan. If you have a bank relationship and decent credit, ask about a consolidation loan or a HELOC. The agency explains that a HELOC is usually variable, can be interest only, and lets the lender change the rate with written notice. Compare it using the HELOC and second mortgage comparison.
If the balance is truly out of reach, a consumer proposal is a legal route through a Licensed Insolvency Trustee. Per the Office of the Superintendent of Bankruptcy, it is open to people whose debts, not counting a mortgage on the home they live in, are $250,000 or less, and it cannot run longer than five years. A trustee will explain it, and whether it fits. Licensed Insolvency Trustees generally offer the first consultation free.
Three ways to clear the same debt
Picture the same $40,000 of card balances and three routes. Keeping the cards costs the most in interest and asks nothing of your home. A consumer proposal asks a trustee to negotiate, shrinks what you repay and has its own cost and credit consequences. A second mortgage moves the debt onto the house, lowers the payment, and adds fees. None of the three is free, and the cheapest on paper can be the riskiest in practice, so compare all three on total cost and on what happens if your income drops.
How the exit works
Before you sign, write down the answer to one question: on the day the loan comes due, where does the money come from? Common answers are a refinance with a bank at a lower rate, selling the home, or a payoff from savings or an expected sum. A refinance depends on your credit and income at that time, which you cannot know today, so test the plan against a bad case.
If you cannot answer, do not sign yet. A lender or broker who skips that question is not looking after you.
What to ask before you sign
- The total cost of borrowing in dollars for the full term, with every fee shown.
- What you will still owe on the last day.
- What it costs to extend if you need more time.
- The consequence of one late payment.
- Who the licensed professional is, their licence number, and how to check it with your provincial regulator.
If you want to talk it through with a licensed mortgage professional in your province, you can check your options. You are free to say no.
One year: $40,000 of card debt moved into a second mortgage
Made-up figures. The cards carry an assumed 20% interest and you pay only the interest. The second mortgage is interest only at an assumed 12%, with an assumed 2% lender fee, 1.5% broker fee and $2,000 for legal, appraisal and title.
- Card interest for a year if you keep the cards
- $8,000
- Second mortgage interest for a year
- $4,800
- Lender fee
- $800
- Broker fee
- $600
- Legal, appraisal and title
- $2,000
- Second mortgage cost in year one
- $8,200
$40,000 at 20%
$40,000 at 12%
Two years: the same loan, renewed once
Same made-up figures, plus an assumed 1% fee to renew the loan for a second year at the same rate.
- Card interest over two years if you keep the cards
- $16,000
- Second mortgage interest over two years
- $9,600
- First-year fees
- $3,400
- Renewal fee, assumed 1%
- $400
- Second mortgage cost over two years
- $13,400
Questions people ask
Does consolidating debt into a second mortgage hurt my credit?
Applying can lead to a credit check, and a new loan appears on your credit report. Paying off cards usually lowers the amount of credit you are using, which many scoring models treat well. Running the cards up again undoes that, and a missed payment on the new loan does more damage than a missed card payment.
Can I consolidate if I am behind on payments?
Some private lenders will consider it, because they look mainly at the equity. Costs tend to be higher when a file has arrears, and if a lender has already sent a legal notice you should speak to a lawyer first. The help section covers notices and deadlines.
What happens to my credit cards after they are paid off?
They stay open unless you close them. Keeping the spending habit that built the balance is the main reason consolidations fail, which is why the Financial Consumer Agency of Canada warns that the same habits can rebuild the debt on top of the new loan.
Is interest on a consolidation loan tax deductible?
Usually not when the money pays off personal debts, because the rules depend on what the borrowed money is used for. A tax professional can tell you what applies to your case. Do not count on a deduction when you work out the cost.
How long does a consolidation second mortgage last?
Terms vary by lender, and many private loans are short, with the balance due at the end. Ask for the term in writing, and ask what it costs to extend if you cannot repay on time.
What if my debts are too big for this to work?
If the new payment still would not fit your budget, or you would be borrowing to cover borrowing, look at a consumer proposal through a Licensed Insolvency Trustee. It is a legal process for people who cannot pay what they owe in full, and the first conversation costs nothing.