Should High Interest Credit Cards
Be Paid Off Using Home Equity?

Understanding Home Equity

Home equity is a concept that homeowners should be familiar with. It refers to the difference between the current market value of your home and the remaining balance of your mortgage. As you make mortgage payments or as your property value increases, you build equity in your home. This equity can be a powerful tool when it comes to financial planning and debt management. Think of it as a savings account that grows with each mortgage payment you make and as your property’s value appreciates. Over time, this equity can become a significant financial asset. It’s also important to note that home equity can be negative if your home’s value decreases or if you borrow against it.

Understanding House Values

The housing market plays a significant role in home equity. The value of your home, which determines your home equity, is influenced by the housing market. When the housing market is strong, your home value may increase, leading to increased home equity. Conversely, if the housing market is weak, your home value may decrease, leading to decreased home equity.

Calculating Home Equity

Calculating home equity is a straightforward process, but it’s crucial to get it right. To calculate your home equity, you subtract the remaining balance of your mortgage from the current market value of your home. This gives you an idea of how much you could potentially borrow using your home as collateral. It’s important to note that the market value of your home can fluctuate based on a variety of factors including the housing market conditions and improvements made to the property. Regularly reassessing your home’s value can help you keep track of your equity. The amount of home equity can change as you make mortgage payments and as your home’s value changes, and of course, if you borrow against it.

Borrowing Against Your Home Equity

Prime type of lenders, like bank and credit unions, generally allow borrowers to borrow up to 80% of their home’s equity. However, some alternative and private lenders may go higher. The amount you can borrow also depends on your income level, debt level, and credit health. Keep in mind that borrowing against your home equity means that your home serves as collateral for the mortgage. Therefore, it’s crucial to have a solid plan for repayment before taking out a new debt.

Accessing Home Equity Through Refinancing

Refinancing your mortgage is one way to access your home equity in order to manage your debt better. This involves replacing your existing mortgage with a new one, which could be larger than the outstanding balance of your current mortgage. The difference would then be paid out to you, to use as needed. Refinancing can be a good option if mortgage rates have dropped since you took out your original mortgage, and your credit score has improved and you qualify for a lower rate. It can also be a good way of replacing high interest debt, like credit cards and other debt, with a new mortgage, thus saving you money with each regular payment. This can simplify your financial management by consolidating multiple payments into one. Moreover, the new credit will often have lower interest rates than credit cards, which means you could save money on interest by consolidating your high-interest debts. Refinances are usually done by taking out first or second mortgages, HELOCs (home equity lines of credit), and Home Equity Loans. Any of these could be done through prime, alternative or private mortgage lenders, based on your income and financial situation. The list of possibilities for refinance is endless, here are few: funds for post-secondary education, paying off debt, house renovation, investments, trips, outstanding taxes, business start-up, vehicle purchase, etc.

First Mortgage Refinancing

First mortgage refinancing involves replacing your existing first mortgage with a new one. The new mortgage pays off the existing one, and the remaining amount after paying off the first mortgage you can use as you see fit. This can be a good option if you have a significant amount of home equity and want to consolidate your high-interest debts into a single, lower-interest payment.

Second Mortgage

A second mortgage is another way to access your home equity. This involves taking out a second loan, in addition to your first mortgage, against the equity in your home. Second mortgages usually have higher interest rates than first mortgages, but they can still be lower than credit card interest rates, making them a viable option for paying off high-interest credit card debt.

HELOCs and Home Equity Loans

A Home Equity Line of Credit (HELOC) is a type of credit that homeowners find attractive as it enables them to utilize their home’s value. Essentially, a HELOC converts your home’s worth into a flexible credit line. It serves as a financial instrument that can supply the necessary funds as and when required. It’s like to a safety net that can be accessed for additional funds whenever needed.

On the other hand, a home equity loan, often known as a second mortgage, is a loan type that permits homeowners to borrow against their home’s equity. Contrary to a HELOC, a home equity loan pays a one-time lump sum of money, which the homeowner repays over a predetermined period. The interest rate for a home equity loan is typically fixed, ensuring consistent monthly payments for the loan’s duration.

Understanding Credit Card Debt

Credit card debt is a common issue for many Canadians. It can accumulate quickly due to high interest rates and the ease of making purchases. However, if not managed properly, credit card debt can lead to serious financial problems. It’s important to understand how credit card debt works, how interest is calculated, and the impact it can have on your financial health. This understanding can help you make informed decisions about credit card use and debt management.

The Impact of Debt on Financial Health

Carrying high-interest debt can have a significant impact on your financial health. It can lead to lower credit scores, increased financial stress, and reduced future borrowing ability. It’s important to understand these impacts and to take steps to manage and reduce your debt.

The Psychological Impact of Debt

Debt can have a significant psychological impact. It can cause stress, anxiety, and even depression. These psychological effects can affect your quality of life and even your physical health. Managing your debt effectively can help reduce these psychological impacts. It’s important to consider not only the financial implications of debt but also the psychological ones.

Step-by-Step Process for Using Home Equity to Pay Off Credit Cards

The process of using home equity to pay off debt involves several steps. The first step is to calculate your total debt. This includes all types of debt such as credit card debt, payday loan debt, car loan debt, student loans, and personal loan debt. Then you will need to apply to a lender that offers this type of lending, either directly or through a broker. You will need to provide the documents that are requested from you, and most likely an official appraisal will be performed to confirm the value of the house. Your broker and/or your lender will guide you through the steps. The whole process from application to funding can take anywhere from couple of weeks to about a month. Once you’ve been approved for your refinance, and funded, you can use it to pay off all your debts. This can simplify your debt management as you’ll only have one payment to manage. However, it’s important to remember that this should be part of a larger plan to get out of debt and stay out of debt. It’s not a quick fix, but a tool that can be used as part of a debt management strategy. Also, remember that while consolidating your debts can simplify your payments, it’s still important to have a plan for avoiding future debt.

Documents Needed for Refinancing

Applying for a home refinancing requires several documents. These include a government-issued photo ID, Social Insurance Number (SIN), up to two years of income tax returns, proof of employment, the lender may request 3-6 months’ worth of bank statements, your property’s information, recent mortgage statements, and the most recent property tax bill, as well as any other documents as per the lender’s qualification guidelines. These documents help the lender assess your financial situation and determine how much you can borrow. Being prepared with these documents can speed up the application process.

Private Mortgages: An Alternative Way of Accessing Home Equity

Private mortgages can be another way to access your home equity. These are loans provided by private lenders, rather than traditional financial institutions. They can be a good option for homeowners who may not qualify for traditional lending due to poor credit or other factors. However, they often come with higher interest rates and fees, so it’s important to weigh the costs and benefits. Understanding the pros and cons of private mortgages can help you make informed decisions if this type of lending is right for you.

The Role of Credit Score in Debt Management

Your credit score plays a crucial role in managing your debt. It affects your ability to borrow money and the interest rates you’re offered. A high credit score can help you secure loans with lower interest rates, making debt management easier. On the other hand, a low credit score can make it more difficult to borrow money and may result in higher interest rates. Understanding the role of your credit score in debt management can help you make informed decisions about borrowing and repaying debt.

Disadvantages Of Debt Pay Off with Home Equity


  1. Risk of Foreclosure or Power of Sale: As with any mortgage, if you’re unable to make your home payments, you could potentially lose your home to foreclosure or power of sale. Your home is used as collateral for the mortgage, so it’s crucial to have a solid plan for repayment.
  2. Costs and Fees: Refinancing often comes with various costs and fees, such as closing costs, sometimes lender and broker fees, appraisal cost, etc., which can add to the overall cost of the mortgage.
  3. Difficulty qualifying: Sometimes qualifying for this type of financing can be challenging for various reason, such as not enough existing equity in the property, lower appraisal values, some first mortgage lenders having rules that don’t allow second mortgages behind their first, stricter lending guidelines, etc.
  4. Potential for More Debt: If you use a home equity to pay off your credit cards, you could potentially end up in more debt if you continue to use your credit cards and accrue more debt.
  5. Longer Repayment Period: Refinancing often extends your repayment periods by having extended amortization. This means you could be in debt for a longer period of time.

Everyone’s financial situation is unique, and it’s important to weigh the pros and cons and consider your own circumstances before deciding to use home equity to pay off high-interest credit card debt. Consulting with a financial advisor or mortgage professional can provide valuable guidance.


Using home equity to pay off debt is a significant decision that should be made with careful consideration. A mortgage professional can help you understand the potential risks and benefits and guide you in making the decision that’s right for your financial situation. Keep in mind, while home equity can be a powerful tool for debt management, it may not be the right solution for everyone. While this can make your debts easier to manage, it does not eliminate your debt, it simply moves it. Therefore, it’s crucial to continue practicing good financial habits even after consolidating your debts. Also, remember that while a refinancing can help consolidate your debts, it does not address the behaviours that led to the debt in the first place.

If you’re considering using home equity to pay off high-interest credit card debt, reach out to us at Ltd. We’re here to help guide you through the process. Call us at (519) 252-9665 or visit our website for more information.

Please note that this information is current as of the time of writing and is intended for general informational purposes only. It should not be relied upon as financial advice. Always consult with a mortgage professional for advice tailored to your specific circumstances.

This article was brought to you by Ltd., a licensed mortgage brokerage. Our licensing status with the Financial Services Regulatory Authority of Ontario (FSRA) can be confirmed through this link.

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