Secured vs. unsecured debt: the key risk
Credit cards and most personal loans are unsecured, if you fall behind, it hurts your credit, but the lender has no claim on your home. When you consolidate into a mortgage, HELOC or second mortgage, that debt becomes secured by your property. Missing payments could ultimately lead to power of sale. This is the most important trade-off to understand before you proceed.
What lenders look at
- Home equity: the appraised value minus what you owe. Conventional lending generally caps total borrowing at 80% of value.
- Income: enough stable, verifiable income to carry the new payment (and pass the federal stress test where it applies).
- Credit history: your score and payment history; private lenders may be more flexible.
- Debt service ratios: total housing and debt costs relative to income.
- The property: type, condition and location.
It may make sense when…
- You have meaningful equity and high-interest balances
- The interest saved clearly outweighs penalties and fees
- You have a plan to avoid running balances back up
- The new payment fits comfortably in your budget
It may not make sense when…
- The costs of breaking your mortgage exceed the savings
- Your income can't reliably support the new payment
- You're likely to re-borrow on the paid-off cards
- Your debts are small enough to pay down with a budget, or large enough relative to income that a consumer proposal or credit counselling may be more appropriate
If home equity isn't the right fit, you'll be told so. Non-profit credit counselling agencies and Licensed Insolvency Trustees can be good resources for alternatives.