Refinancing to pay off credit cards and a car loan: how much you save each month, and what to watch for

How much you save each month: an example

An example (illustrative numbers, not a quote): $18,000 on credit cards at 19.99%, paying $600 a month — at that pace it takes 42 months to clear and costs about $7,155 in interest; and a $45,000 car loan at 7.99% with 48 months left at $1,098 a month, about $7,722 in interest still to come. Together, that's $1,698 a month.

Roll the $63,000 into the mortgage at, say, 4.5% over a 25-year amortization, and the payment rises by only about $349. You pay about $1,350 less each month.

You save on the payment, not necessarily on interest

Pay that $63,000 off slowly over 25 years and the interest comes to about $41,600 — over $20,000 more than the roughly $14,900 the two debts would have cost. The Financial Consumer Agency of Canada (FCAC) warns about exactly this: consolidating can extend your repayment period and cost more in interest over time.

To actually save interest, keep putting $1,698 a month toward it after the refinance and send the difference to the mortgage as prepayments: the $63,000 is gone in about 40 months, with about $4,900 in interest — roughly $10,000 less than the original two debts. That depends on your contract allowing prepayments of that size each year (your prepayment privilege), so check before you sign.

A refinance isn't automatic: new approval, the stress test, and an 80% cap

A cash-out refinance is effectively a new mortgage: your income and credit are reviewed again, you have to pass the stress test, and the home gets a new appraisal.

You can generally borrow up to 80% of the home's value (80% is the legal maximum for uninsured mortgages). For example, if the home appraises at $1.5 million and you owe $900,000, the most you can borrow is $1.5 million × 80% = $1.2 million — up to $300,000 out. Whether your income can carry the new payment is a separate hurdle.

A cash-out refinance generally can't be insured (a refinance to build a secondary suite is the exception), so it's priced from the uninsured tier — and the new rate generally applies to the whole mortgage, not just the new money.

If your term isn't up, work out the penalty first

Refinancing mid-term means breaking your contract, which usually costs a penalty: the higher of three months' interest or the interest rate differential (IRD). On top of that come appraisal fees, title search and title insurance fees, and legal fees.

If the penalty and fees would eat several months of the payment savings, consider moving the most expensive debt (usually the credit cards) onto a line of credit for now and doing the refinance at maturity. For how to weigh now against later, see Want to refinance before your renewal? Now or at maturity — how to weigh the penalty against the rate.

Another route: a home equity line of credit (HELOC)

A HELOC can go up to 65% of the home's value, and you pay interest only on what you use; it also requires approval and the stress test. Many lenders let you pay only the interest each month — the lowest possible payment, but the principal never goes down.

If you use a HELOC to clear credit cards, set a payoff schedule and pay principal down on it every month, so it doesn't turn into a debt that never ends.

When to hold off

If the credit cards built up because you spend more than you earn each month: as FCAC points out, keep the spending habits that caused the debt and you'll accumulate more. Refinance, run the cards up again, and you've simply added another debt to the house.

If the car loan has only a year or so left, or carries a very low promotional rate: rolling it in saves little, and stretching it over 25 years can cost more.

If your income is unsteady or the payments are already tight: this money is now secured by your home, and as FCAC notes, if you can't repay what you borrow you may face serious consequences, including foreclosure.

Common questions

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