Can I Refinance My Mortgage to Pay Off Credit Card Debt?
Yes, most homeowners in Canada can refinance to pay off credit cards if they own enough of their home. Lenders will usually lend up to 80% of the home's value, so the room you have is 80% of the value minus what you still owe. The 3 things to check before you do it are what breaking your current mortgage costs, whether you qualify for the bigger loan, and how you'll keep the cards at zero afterwards.
Can I refinance to pay off credit card debt in Canada?
You can, as long as the new, larger mortgage stays within 80% of your home's value and you qualify for its payment. A refinance replaces your mortgage with a bigger one and pays out your other debts from the difference, so the cards, lines of credit or car loan end up rolled into one mortgage payment.
A bank decides this the same way it decides any mortgage. It looks at what your home is worth, what you earn and what you already pay each month. Paying off the cards lowers what you pay each month, which helps. The bigger mortgage raises it, and the lender has to qualify you at the federal stress test, a rate set higher than the one you'd pay.
How much equity can I use to consolidate debt?
Take 80% of what the home is worth and subtract your mortgage balance. What's left is the most a refinance can reach before costs.
With round numbers, the math for one homeowner looks like this.
| Line | Amount |
|---|---|
| Home value | $700,000 |
| 80% ceiling | $560,000 |
| Minus current mortgage | $380,000 |
| Room available | $180,000 |
| Credit cards to clear | $28,000 |
| Line of credit to clear | $12,000 |
| Room left after paying both | $140,000 |
This owner has plenty of room. If the home were worth $500,000, the ceiling would be $400,000 and the room only $20,000, which wouldn't cover the $40,000 of debt.
How much are credit cards costing me each month?
The Financial Consumer Agency of Canada uses a 19.99% purchase rate in its sample card agreement. At that rate, $28,000 on the cards costs about $466 a month in interest alone ($28,000 times 19.99%, divided by 12), before a single dollar of the balance comes down.
The same agency shows how slow minimum payments are. In its example, a $2,000 balance at 18% paid at $60 a month takes 3 years and 11 months and $793 in interest to clear. Paying $160 a month clears it in 1 year and 2 months with $231 of interest. A mortgage rate is far lower than a card rate, which is where the monthly relief comes from. In exchange, the debt now runs as long as the mortgage does.
What does it cost to break my mortgage to refinance?
If you refinance before your term ends, your lender charges a prepayment penalty. On a fixed rate, most lenders charge the greater of 3 months' interest or the interest rate differential, which compares your rate with what the lender could lend the money at today. On a variable rate, it's usually 3 months' interest.
The fixed-rate penalty at the big banks can run into the tens of thousands, because of how they calculate the rate differential. Get the exact figure from your lender before you decide, and compare it with the card interest you'd stop paying over the rest of your term. Our penalty comparison shows how much the same mortgage's penalty varies from lender to lender.
You'll also pay for an appraisal and a lawyer or notary on most refinances. Some lenders cover part of those costs.
Is a refinance, a HELOC or a second mortgage better for debt consolidation?
| Option | How it works | When it fits |
|---|---|---|
| Refinance | Replaces your mortgage with a larger one, up to 80% of value | You're near renewal, or the penalty is small next to the interest saved |
| Home equity line of credit (home equity line of credit (HELOC)) | A revolving line on top of your mortgage, up to 65% of value on its own and 80% combined | Your mortgage has a big penalty and you can pay the line down fast |
| Second mortgage | A separate loan behind your first, often from a private or alternative lender | You can't qualify for the other 2 and need a short bridge to fix credit |
A line of credit is the easiest to borrow from again, which also makes it the easiest to run back up. A second mortgage costs more than a first and is meant to be short term, with a plan to pay it out at your next renewal.
How do I avoid running the cards back up?
The biggest risk in debt consolidation is ending up with the bigger mortgage and new card balances 2 years later. 3 habits prevent it.
- Keep paying close to what you paid on the cards, and send the difference to the mortgage as prepayments. The debt disappears years sooner.
- Close or lower the limits on cards you don't need once they're paid.
- Look at what built the balance. If it was one event, like a job gap or a renovation, the refinance fixes it. If it's monthly spending above income, the refinance gives you time, and the spending still has to change.
When is the best time to consolidate debt into my mortgage?
Your renewal date is usually the cheapest point, because there's no penalty to break the mortgage. If your renewal is within 4 to 6 months, it can pay to carry the cards a little longer and refinance at maturity. If it's years away and the card interest is growing faster than the penalty, acting sooner can cost less. Our EQUITY framework runs that comparison, and the equity calculator shows your room today.
Frequently asked questions
How much can I borrow against my home to pay off debt?
- Up to 80% of your home's value, minus your mortgage balance, at most lenders. A home worth $700,000 with $380,000 owing has up to $180,000 of room before costs.
Will refinancing to pay off debt hurt my credit score?
- The application adds a credit check, which can dip your score a little for a short time. Paying cards down to zero lowers how much of your available credit you're using, which usually helps your score over the following months.
Can I refinance if my mortgage is insured?
- Yes, but the new loan can't be insured. That's why a refinance stops at 80% of your home's value even if you bought with less than 20% down.
Do I have to pass the stress test to refinance?
- Yes. A refinance is a new, larger loan, so the lender qualifies you at the federal stress test rate, which sits above the rate you'll pay. The straight-switch exemption at renewal doesn't apply when the balance goes up.
Is it smarter to wait for renewal to consolidate debt?
- Often, if renewal is a few months away, because there's no penalty at maturity. If renewal is years away, compare the penalty with the card interest you'd pay in the meantime and pick the cheaper path.
Can I consolidate debt with bad credit?
- Sometimes. Late payments or high balances can rule out the big banks, but alternative and private lenders do lend against home equity at higher cost. The plan should be to move back to a regular lender within 1 or 2 years.