Refinancing requires you to break your mortgage term early and consolidate your mortgage and other debts into one loan of up to 80% of your home’s value (otherwise known as the LTV, Loan-to-Value ratio).
Since you are breaking a contract, you will incur a penalty.
There are three main ways to consolidate your debt into your mortgage.
The penalty can range from three months’ interest with a variable mortgage to a more significant interest rate differential penalty with a fixed mortgage. It allows you to access up to 80% of your home’s value, minus whatever outstanding mortgage balance you may currently have.
All HELOCs are variable mortgage rates and come with a slightly higher interest rate than a traditional 5-year variable mortgage rate.
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This means that you would take out a loan that would pay all of your existing accounts.
You would then be left with one loan payment each month, often saving you interest over time.
Of the 10% of Canadians who refinanced their mortgages last year, 62% cited debt consolidation or repayment as the main reason for their refinance.
This is because consolidating high interest debt – like credit card balances and auto loans – into a low interest mortgage can save you thousands in interest payments.
In order to determine if you can consolidate debt into your mortgage, you start by determining how much available equity you have.
In Canada, this is determined by taking 80% of your home’s value and subtracting any existing mortgage balance.