To consolidate or not to consolidate?

Everyone knows that credit card debt is “bad” debt due to the high interest rates on most consumer credit cards. And also due to the fact that most items that relate to credit card or consumer debt depreciate or loose value very fast as opposed to your home mortgage which is for an asset that in most economies gains in value over time.

But sometimes the difference between “good” and “bad” debt isn’t so clear-cut. Because of this generalization, some people make the decision to increase their home mortgage in order to pay off their credit card and short term debt.

If you are considering doing this please take advice and consider the implications.

Why refinancing consumer debt to your mortgage is not a good idea

The cost of your mortgage is more related to the term of the mortgage, i.e. 25 or 30 years as opposed to the interest rate you are paying. Consolidating consumer debt even at a saving in interest rate of 15% or more will be very costly if it gets merged in with a 25 or 30 year loan term. Refer to the example below:

Amount Term Interest rate Total interest cost
$10,000 4 years 19.95% $4,551
$10,000 25 years 6% $9,318

As you can see buying a car on a house loan out of your line of credit can be very expensive unless you make a deliberate action to keep the loan set at a short term and keep it this way if you ever refinance your home loan before the short term debt is paid off.

  • If you refinance and do not close the accounts or reduce the limits you are setting a pathway to gain extra short term debt again.
  • You are using house equity that could otherwise be used for investing or leveraging off to buy a rental property for example.
  • You are converting unsecured debt to secured debt. Using your main asset as security.
  • If you are doing this in the process of refinancing your mortgage remember this process costs money: legal fees, valuation break costs and bank admin fees. Remember to take these into account.

Final Word

If you refinance your home and or consolidate your short term debt and credit cards onto your mortgage make sure if makes sense to do so. If at all possible set the consolidated debt separate from your mortgage with a short term. Focus your financial energies on down paying this fast.   

Close your credit cards, convert any to debt cards and make a plan to build up a financial emergency account to cover emergencies and plan for big items so you save for them rather than using credit. Remember if you have accumulated short term debt it essentially means that in that given year you have spent more than you have earned.  

To start the process, please schedule a quick Strategy Session with us today!

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