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Refinance and Consolidate, Top 10 Reasons Why

There's a lot of talk going on today about refinancing and consolidating. However, not everyone understands what it means, or why it’s done. Refinancing your mortgage loan basically means taking out a new loan with different terms to pay off the original mortgage. On the other hand, consolidating debt entails combining all your high-interest debt into one monthly payment. When you consolidate your debts, your auto loans, high-interest credit cards, and personal line of credit are lumped into a single monthly payment. 

So, to understand the reasons why Canadians consider refinancing and consolidating, here are the top 10 reasons.

1. Minimizing interest charges

One of the main goals of any debt consolidation option is to reduce or eliminate the interest rate applied to your debt. Minimizing accrued monthly interest charges allows you to save money and focus on repaying the principal – the actual debt you owe. By consolidating your debt, you may be able to qualify for a lower interest rate. 

2. Easy finance management

The primary purpose of consolidating multiple debts is to pay back everything you borrowed and charged in a more efficient way. It’s perhaps the first step to redemption. In turn, this makes debt management much simpler and can help you avoid late fees or penalties. 

3. Lock in a lower mortgage rate

One of the reasons Canadian homeowners choose to refinance their mortgage is to realize savings on interest costs by locking in a lower rate. The amount you can save may seem trivial at first, but over time, it adds up. If you want to compare home loans and see if a refinanced mortgage may help you save on monthly repayment, use our mortgage calculator

4. Lump all your unsecured debts into a single monthly payment

Juggling multiple credit cards, unsecured personal loans, and Lines of Credit (LOCs) can be a challenge. Fortunately, debt consolidation combines all your unsecured debts into a single monthly payment. 

5. Quicker debt repayment

When you combine your debts into a single payment (consolidating), repayment appears to be faster than other methods. One of the main debt consolidation advantages is that it can help you repay your debt quicker than through other means. Since you’ll only have to make a single monthly payment instead of multiple ones, you can put more money toward repaying your debt each month, which will bring you closer to financial freedom.

Additionally, since a consolidation loan has a fixed timeline, you’ll know exactly when you’ll become debt-free. And by repaying everything on time, you’ll simultaneously incur less interest overall. 

6. Improved credit score

Another point to note is that debt consolidation can also help improve your credit score and credit report. This is because debt consolidation lowers your credit utilisation ratio, which is the amount of debt you have in comparison to your credit limit. Essentially, a lower ratio will improve your credit score over time. 

However, as a borrower, you have to know that a debt consolidation loan will initially lower your score due to the hard credit inquiry. But your score will then improve over time as you will be regularly paying a single monthly bill. 

7. May reduce monthly payment

When consolidating debt, your overall monthly payment is likely to decrease because future payments are spread out over a new and, perhaps extended, loan term. While this can be of great advantage from a monthly budgeting standpoint, it also means that you could pay more over the life of the loan, even with a lower interest rate.

8. Your property’s value has increased.

Your property’s increased value makes refinancing your home loan a great move. If your home’s value has jumped, even just a bit, it is possible to refinance and get a better rate. Banks usually give better interest rates to borrowers with more equity.

9. You want to fund your home renovation. 

Home renovations are a serious business. Refinancing your mortgage may help you pay for renovations that may have the best financial return on investment. To make refinancing your mortgage work for your home renovation, make sure to research and plan out the projected budget. Calculate how much you want to spend on the renovation and whether you can afford to repay the amount.

10. You want to consolidate your debts.  

Refinancing your mortgage to consolidate debt may help you repay high-interest debts like credit cards or car loans. When you refinance your home loan to consolidate your debt, your old home loan is replaced with a new one that includes repayments for your other debts. But, it is wise to consider the new loan term and its total interest costs when refinancing your home loan to consolidate debts.

Ali Zaidi UW Ali Zaidi UW 11/25/2022
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