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GLOSSARY

Canadian Financial, Real Estate and Mortgage Glossary

How often this word is used
 
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50% - Moderately

Debt Consolidation


Synonyms:amalgamate, combine debt, compact, consolidate debt, pool all debts, refinance
Filed Under: financial-banking, investments, mortgages
Tags: banking, bankruptcy, debt, investment, mortgage
 

Definition of debt consolidation

debt consolidation
1. The act of paying off several separate bills or smaller loans with a single larger loan, often with a lower monthly payment and a longer repayment period.
2. Using the equity in your home to negotiate a low interest rate loan to pay off multiple high interest credit cards and other bad debt. Also called a consolidation loan.

Example of Debt Consolidation

Before Debt Consolidation
Debt Interest Rate Monthy Payment Interest Paid in 4 Years
Credit Card $30,000 19.0% $900 $13,000
Credit Line $10,000 9.0% $250 $1,950
Car Loan $45,000 7.5% $1,100 $7,300
Mortgage Loan $300,000 6.5% $2,000 $74,300
Total $385,000 $4,250 $96,550

All calculations in the above example are based on four years (4 year mortgage term, 4 year financing for car loan and 4 years to payout of all credit debt). Credit debt payments are calculated at a fixed amount using the first payment (3% of credit card balance and 2.5% of credit line balance). Monthy mortgage payment calculation is a based on a standard amortization of 25 years.

Reducing monthly payments

After Debt Consolidation
Debt / Expenses Interest Rate Monthy Payment Interest Paid in 4 Years
Total Debt $385,000 - $0 $0
Penalties* $9,000 - $0 $0
Appraisal $300 - $0 $0
Legal Costs $700 - $0 $0
New Mortgage Loan $395,000 5.0% $2,300 $74,900

* Penalties can be avoided by consolidating debt at the time of your mortgage renewal.

Reducing the amortization of your mortgage

By converting all high interest credit debt into a low interest mortgage loan, you should have more money to contribute to paying off your mortgage faster while still having a lower monthly payment. In this example, the money that is saved on monthly payments can go towards reducing the amortization from a standard 25 years down to less than 15 years just by increasing your payment by an extra $950 a month.

After Debt Consolidation
New Mortgage Loan Interest Rate Monthy Payment Mortgage Paid In Interest Savings
$395,000 5.0% $3,250 14 years, 2 months $167,450

Super Brokers has access to Canada's best debt consolidation products, for more info about debt consolidation see our debt consolidation page.



Related Terms and Acronyms:

  • blended rate mortgage   If a homeowner renews his or her mortgage early, the old and the new mortgage rates are blended together to split the difference between the interest rates.
  • cash back mortgage   A mortgage that provides the borrower a lump sum cash payment.
  • home equity line of credit (HELOC)   An open-ended loan, paid as revolving debt, that is backed by the equity in the property.
      ➥  Also known as a Home Line of Credit.
  • mortgage (mtg)   A mortgage is a contract stipulating a specific real property, typically a residence or building, as collateral for a loan. The mortgage incurs a rate of interest that varies according to term and other features.
  • mortgage acceleration clause   A provision of a loan agreement that lets a lender demand payment of the full balance under specified circumstances, such as sale of the property, default or refinancing. Not commonly used in Canada and/or Canadian lenders.
  • mortgage application   A document in which a prospective borrower details his or her financial situation to qualify for a loan.
  • Mortgage Broker (MB)   One who finds clients perspective lenders at generally no cost. Mortgage Brokers have a special relationship with lenders and can offer their clients the best rates and service. CanEquity goes through great lengths to ensure you are serviced by the best Mortgage Brokers in Canada.
  • refinance   To arrange a new loan for an increased amount or better terms whereby the old loan is paid off from the proceeds of the new loan.
  • refinancing   The act of paying off one mortgage with another mortgage to take advantage of lower interest rates. Refinancing is also used to transform equity into cash for vacations, home improvements, or for consolidating debt.
  • total debt service (TDS)   The ratio of a borrower's total monthly debt payments to his or her monthly gross income. Lenders use this ratio to determine how much of a loan a borrower is qualified for.

More Related Terms and Acronyms

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