Can You Consolidate Debt With a Home Equity Loan?

As a homeowner, you’re building more than just a life in your property—you’re building equity. This is the portion of your home you truly own, and it grows with every mortgage payment you make and as your home’s value increases. This equity is a powerful financial resource, but many people aren’t sure how to use it effectively. If you’re dealing with high-interest debts, you might be wondering if this asset can help. So, can you consolidate debt with a home equity loan? Absolutely. It’s a method that allows you to borrow against the value you’ve built up, turning that equity into a practical tool to pay off other creditors. This can streamline your budget and potentially save you thousands in interest.

Key Takeaways

• Consolidate Debt into One Lower-Cost Payment: Use a home equity loan to pay off high-interest credit cards and personal loans. You'll be left with a single, predictable monthly payment, and the lower interest rate can save you a significant amount of money over time.
• Remember Your Home Secures the Loan: This strategy turns unsecured debts into a loan backed by your property. It's essential to have a stable budget and address past spending habits, as missed payments put your home at risk.
• Calculate Your Potential Borrowing Power: In Ontario, your total home loans—including your mortgage and the new loan—generally cannot exceed 80% of your home's appraised value. This calculation, along with your income and credit, determines how much equity you can access.

What Is a Home Equity Loan?

If you’re a homeowner, you’ve probably heard people talk about using their home’s equity. But what does that actually mean? Think of a home equity loan as a way to borrow money using the value you’ve built up in your property as security. It’s sometimes called a second mortgage because it’s a separate loan from your primary one.

With a home equity loan, you receive a one-time lump sum of cash that you can use for almost anything—from major home renovations to consolidating higher-interest debts. You then pay back the loan in regular, predictable installments over a set period. It’s a straightforward way for homeowners to access funds for big life goals without having to sell their property.

First, What Is Home Equity?

Before we go any further, let’s clear up what “home equity” is. In simple terms, it’s the portion of your home that you truly own. It’s the difference between your home’s current market value and the amount you still owe on your mortgage.

Here’s a quick example:

• Your home’s current market value: $800,000
• Your remaining mortgage balance: -$500,000
• Your home equity: =$300,000

As you pay down your mortgage and as your property value increases over time, your equity grows. This growing value is an asset you can potentially borrow against to achieve other financial goals.

How a Home Equity Loan Works

A home equity loan works by letting you borrow a portion of the equity you’ve built. You apply for a specific amount, and if approved, you receive the full sum all at once. This makes it a great tool for large, one-time expenses.

For debt consolidation, the process is simple. You use the lump sum from your home equity loan to pay off other debts, like credit card balances, car loans, or lines of credit. Instead of juggling multiple payments with different due dates and high interest rates, you’re left with just one new loan payment to manage, often at a much lower rate.

Fixed vs. Variable Rates: What's the Difference?

When you take out a loan, the interest rate can be either fixed or variable. It’s important to understand the difference. A fixed interest rate stays the same for the entire loan term. This means your payment amount never changes, making it easy to budget for. Home equity loans almost always come with a fixed rate, offering stability and predictability.

A variable interest rate, on the other hand, can change over time. It’s tied to the prime lending rate, so if the market rates go up, your payments could too. This type of rate is more common with a Home Equity Line of Credit (HELOC). The Government of Canada provides more detail on how different interest rates work.

Can You Use a Home Equity Loan to Consolidate Debt?

Yes, you absolutely can. Using a home equity loan for debt consolidation is a common financial strategy for homeowners in Ontario. The idea is to take out one loan against your home's equity to pay off several other, higher-interest debts. This rolls multiple bills into a single, more manageable monthly payment, often with a lower interest rate than what you were paying on things like credit cards or personal loans. It’s a way to simplify your finances and potentially save a significant amount of money on interest over time, helping you get back on track faster.

What Kinds of Debt Can You Consolidate?

A home equity loan is a great tool for tackling high-interest, unsecured debts. Think of the bills that tend to have the highest rates and can feel the most difficult to get ahead on. The most common examples include credit card balances, which often carry interest rates of 20% or more. You can also consolidate high-interest personal loans, store credit cards, and unsecured lines of credit. By bundling these into a single loan secured by your home, you can typically access a much lower interest rate, making it easier to pay down the principal and become debt-free sooner.

How the Consolidation Process Works

The process is quite straightforward. First, you apply for a home equity loan for the total amount of the debts you want to pay off. Once your loan is approved, you receive the money as a single lump sum. You then use these funds to pay off each of your creditors—your credit card companies, the lender for your personal loan, and so on. Some lenders may even offer to send the payments directly to your creditors for you. After that, you’re left with just one monthly payment for your new consolidation loan instead of juggling multiple due dates and interest rates.

The Pros: Why Use a Home Equity Loan for Debt Consolidation?

If you're juggling multiple high-interest debts, like credit card balances and personal loans, you know how stressful it can be. The different due dates, varying interest rates, and feeling like you’re barely making a dent in the principal can be overwhelming. This is where a home equity loan can be a powerful tool for getting back on track. By using the equity you’ve built in your home, you can combine those scattered debts into a single, more manageable loan.

This strategy isn’t just about getting organized; it’s about creating a clear path forward. Think of it as streamlining your finances. Instead of sending payments to multiple creditors each month, you make one predictable payment. This simplifies your life and can also free up cash flow. For many Ontario homeowners, it can lead to significant savings, a simpler budget, and a renewed sense of control over their financial future. A home equity loan is a secured loan, meaning it's backed by your property. Because this provides security for the lender, it often comes with more favourable terms than unsecured debt. Let's look at the key benefits of using a home equity loan for debt consolidation.

Lower Your Interest Rate

One of the biggest advantages of a home equity loan is the potential for a much lower interest rate. High-interest debts, especially from credit cards, can have rates of 20% or more. Because a home equity loan is secured by your property, lenders see it as less risky. This lower risk often translates into a lower interest rate for you. Swapping high-interest debt for a lower-interest home equity loan means more of your payment goes toward the principal balance, not just interest charges. Over time, this can save you a substantial amount of money and help you become debt-free faster.

Simplify Your Budget with One Payment

Keeping track of multiple payments to different creditors each month is a mental load you don't need. There are due dates to remember, different minimum payments to calculate, and various interest rates to consider. Consolidating your debts with a home equity loan replaces all of that with a single, predictable monthly payment. This makes it so much easier to manage your budget and plan your expenses. You’ll always know exactly how much is due and when, which can reduce financial stress and help you avoid accidental late fees. This newfound simplicity can give you the breathing room you need to focus on your financial goals.

Access a Larger Amount of Cash

If you have a significant amount of debt spread across several sources, an unsecured personal loan might not offer a high enough limit to cover everything. A home equity loan, on the other hand, allows you to borrow against the value of your home. In Ontario, you can generally access up to 80% of your home’s appraised value, minus your remaining mortgage balance. This often provides access to a much larger lump sum of cash, making it possible to consolidate all of your high-interest debts at once. This comprehensive approach ensures you don't leave any costly balances behind, allowing for a truly fresh start.

See How Much You Could Save Each Month

Lowering your interest rate and combining payments doesn't just simplify your life—it can also put more money back in your pocket each month. By replacing high-interest payments with one lower-rate payment, you can significantly reduce your total monthly outlay for debt. At Lotly, we find that homeowners who use a consolidation loan save an average of $1,200 per month. That’s extra cash flow you can use to build an emergency fund, invest for the future, or even make extra payments on your loan to pay it off faster. Seeing that monthly saving is often the moment when the benefits of debt consolidation really click.

The Cons: What Are the Risks to Consider?

A home equity loan can be a fantastic tool for getting your finances in order, but it’s not a decision to take lightly. Being a smart homeowner means looking at the full picture—the good and the not-so-good. While the benefits like a lower interest rate and a single monthly payment are appealing, there are real risks involved when you use your home as collateral. It’s a major financial commitment that ties your debt directly to your most valuable asset.

Before you move forward, it’s crucial to understand the potential downsides. This isn’t about scaring you off; it’s about making sure you’re going in with your eyes wide open. We’ll walk through the four main risks you need to think about: what it means to secure a loan with your home, the upfront costs you’ll face, the temptation to fall back into old spending habits, and how changes in the housing market could affect you. Thinking through these points will help you decide if a home equity loan is truly the right step for your financial situation.

Your Home Secures the Loan

This is the most important risk to understand. A home equity loan is a “secured loan,” which means you’re using your property as collateral to guarantee you’ll pay it back. While this is why lenders can offer lower interest rates, it also means your home is on the line if you can’t keep up with the payments. If you default on the loan, the lender has the right to start legal proceedings to take possession of your home to recover their money. It’s a serious commitment that turns unsecured debts, like credit card balances, into a debt that is directly tied to your house.

Factoring in Closing Costs and Fees

Getting a home equity loan isn’t free. Just like with your original mortgage, there are administrative and legal costs involved in setting up the loan. These are often called closing costs and can include fees for a property appraisal, legal services, and title search. These expenses can add up to a few thousand dollars, depending on your situation. Typically, these costs are deducted from your loan amount, so the cash you receive will be slightly less than the total you borrowed. Be sure to ask for a clear breakdown of all fees upfront so you know exactly what to expect.

The Temptation to Rack Up New Debt

Consolidating your debts into one payment can bring a huge sense of relief. Suddenly, all those credit card balances are at zero. But this is also where a new risk appears. If the spending habits that led to the initial debt aren't addressed, it can be easy to start using those credit cards again. This can create a dangerous cycle where you end up with new high-interest debt on top of your home equity loan payment, putting you in a worse financial position than before. A home equity loan is a tool, not a cure-all; it works best when paired with a solid budget and a commitment to managing your spending.

How Market Changes Can Affect Your Equity

Your home equity isn’t a fixed number—it can change as the value of your property fluctuates. If the real estate market cools down and your home’s value drops, your equity shrinks. In a worst-case scenario, you could end up in a position of negative equity, where you owe more on your mortgage and home equity loan combined than your property is worth. This is sometimes called being "underwater," and it can make it very difficult to sell your home or refinance your loans without bringing cash to the table. While the Canadian housing market has been strong, it’s important to remember that values can go down as well as up.

Do You Qualify for a Home Equity Loan in Ontario?

When you apply for a home equity loan, lenders look at your overall financial picture to decide if you qualify. While every lender has slightly different criteria, they generally focus on four key areas: the amount of equity you have in your home, your credit history and income, your existing debt load, and your property's current value. Understanding these factors can help you see where you stand and what to expect during the application process.

How Much Equity Do You Need?

In Canada, the most you can typically borrow is a combined total of 80% of your home's current value. This is known as the loan-to-value (LTV) ratio. This means you need to have at least 20% equity in your home to be considered for a home equity loan. For example, if your home is worth $800,000, the maximum total mortgage and loan amount you could have against it is $640,000 (80% of $800,000). If you still owe $400,000 on your primary mortgage, you could potentially access up to $240,000 in equity.

What About Your Credit and Income?

Your credit score and income are important pieces of the puzzle. Traditional lenders often prefer a credit score of 680 or higher and look for stable, verifiable income. However, your situation is unique, and not everyone fits that mould. If you're self-employed, have non-traditional income, or are working to improve your credit, there are still options available. Lenders will review your financial history to understand your ability to manage payments, but a less-than-perfect score doesn't automatically close the door.

Understanding Debt Service Ratios

Lenders use debt service ratios to gauge your ability to handle new loan payments on top of your existing financial obligations. There are two main calculations they use:

• Gross Debt Service (GDS) Ratio: This is the percentage of your gross monthly income needed to cover your housing costs (mortgage, property taxes, heating, and 50% of condo fees).
• Total Debt Service (TDS) Ratio: This includes all your housing costs plus any other debts, like car payments, credit card bills, and lines of credit.

Many traditional lenders look for a TDS ratio of 44% or less, but this isn't a hard-and-fast rule. A mortgage brokerage can help find lenders with more flexible guidelines that consider your complete financial story.

The Role of a Property Appraisal

To confirm how much you can borrow, a lender will require a professional property appraisal. An appraiser will assess your home's condition, location, recent sales in your neighbourhood, and other market factors to determine its current fair market value. This independent valuation is crucial because it establishes the "value" part of the loan-to-value calculation. The final loan amount you're offered will be based on this appraised value, not just what you think your home is worth or its municipal tax assessment value.

How Much Can You Actually Borrow?

When you use your home's equity, the amount you can borrow isn't a number pulled out of thin air. It’s based on a clear calculation that lenders use to determine your available credit. The two most important factors are your home's current market value and how much you still owe on your mortgage.

In Canada, there are rules in place to ensure homeowners don’t borrow more than they can handle. Lenders look at your loan-to-value ratio to decide the maximum loan amount you can access. This helps protect both you and the lender. Understanding this calculation is the first step in figuring out how much cash you could potentially free up from your home. It gives you a realistic picture of what’s possible, so you can plan your next steps with confidence, whether you’re thinking about renovations, consolidating debt, or funding another big goal.

A Look at Ontario's Loan-to-Value Limits

The key number to know is your loan-to-value (LTV) ratio. This is a percentage that compares your total mortgage debt to your home’s appraised value. In Canada, financial regulations set a maximum LTV of 80% for home equity loans and refinances. This means the total of your existing mortgage balance plus the new loan generally cannot exceed the lender’s maximum loan-to-value guidelines.

How to Calculate Your Available Equity

Figuring out your potential borrowing power is straightforward. First, you need a current appraised value for your home. Then, you can use a simple formula to get an estimate.

Here’s the calculation: (Your Home’s Appraised Value x 80%) – Your Remaining Mortgage Balance = Your Potential Loan Amount

Let’s walk through an example. Say your home is currently appraised at $900,000 and you have $400,000 left on your mortgage.

1. Calculate 80% of your home's value: $900,000 x 0.80 = $720,000
2. Subtract your mortgage balance: $720,000 – $400,000 = $320,000

In this scenario, you could potentially qualify for a home equity loan of up to $320,000. This is just an estimate, as lenders will also consider your income and credit history, but it’s a great starting point.

How Does a Home Equity Loan Stack Up Against Other Options?

A home equity loan is a powerful financial tool, but it’s not the only one available. When you’re looking to access cash or consolidate debt, it’s smart to compare your options to find the best fit for your goals and financial situation. Each path has its own structure, benefits, and considerations. Understanding these differences is the first step toward making a confident decision for your household. Let’s break down how a home equity loan compares to other popular financing choices like HELOCs, personal loans, and mortgage refinancing.

Home Equity Loan vs. a HELOC

Think of a home equity loan as a straightforward, one-time lump sum of cash. You receive the full amount upfront and pay it back in predictable, fixed installments over a set term. This makes it a great choice for large, specific expenses, like a major home renovation or consolidating a fixed amount of debt.

A Home Equity Line of Credit, or HELOC, works more like a credit card. Instead of a lump sum, you get a revolving line of credit you can draw from as needed. You only pay interest on the amount you use, and rates are typically variable, meaning they can change over time. A HELOC offers more flexibility for ongoing or unpredictable costs, but the fluctuating payments can make budgeting a bit trickier.

Home Equity Loan vs. Personal Loans

The biggest difference between a home equity loan and a personal loan comes down to security. A home equity loan is a secured loan, meaning your home acts as collateral. Because this reduces the lender’s risk, you can often access lower interest rates and larger loan amounts compared to unsecured options. This can make it a more cost-effective way to consolidate high-interest debts into a single, more manageable payment.

A personal loan, on the other hand, is usually unsecured. Since there’s no collateral backing the loan, interest rates are typically higher and borrowing limits are lower. While the application process might be faster, the long-term cost of borrowing is often greater, especially for larger amounts.

Home Equity Loan vs. Mortgage Refinancing

When you take out a home equity loan, you’re adding a second loan on top of your existing mortgage. You’ll have two separate payments to manage each month: your original mortgage and your new home equity loan payment. This approach allows you to keep your current mortgage intact, which is ideal if you have a great interest rate you don’t want to give up.

Mortgage refinancing involves replacing your current mortgage with a new, larger one and taking the difference in cash. You’re left with a single, larger mortgage payment. This can simplify your finances, but it may also mean breaking your current mortgage term, which can trigger substantial prepayment penalties. It’s essential to weigh these potential costs against the benefits of a new loan.

Is This the Right Move for You?

Deciding to use your home's equity to consolidate debt is a major financial step. It can be a powerful tool for getting your finances on track, but it’s not the right solution for everyone. Before moving forward, it’s important to take a clear-eyed look at your financial situation, your habits, and your goals. Answering a few honest questions now can help you make a choice that strengthens your financial future for years to come.

Take an Honest Look at Your Finances

Start by getting a complete picture of your current debt. Make a list of everything you owe, including credit cards, lines of credit, and personal loans. For each one, write down the outstanding balance, the interest rate, and the minimum monthly payment. This exercise helps you see exactly where your money is going and whether combining these debts into a single loan makes sense. A home equity loan is often a good option if it allows you to secure a significantly lower interest rate than what you’re currently paying on your unsecured debts. You can use a budget calculator to see how a new, single payment would fit into your monthly spending.

Address the Root of Your Spending Habits

A consolidation loan can simplify your payments and lower your interest costs, but it doesn’t solve the underlying issues that led to debt in the first place. It’s crucial to think about why you accumulated debt. Was it due to a one-time emergency, like a major home repair, or is it the result of consistent overspending? If you don’t address your spending habits, you risk running up your credit cards again after you’ve paid them off. This could leave you with both the new home equity loan payment and fresh credit card debt, putting you in a tougher financial spot than when you started.

When It Makes Good Financial Sense

Using a home equity loan for debt consolidation works best when you have a clear plan. For many homeowners, it’s a strategic way to trade high-interest debt for a single loan with a lower, fixed interest rate. This can save you a substantial amount of money on interest over time and make your monthly budget much more predictable. If you have a stable income and are committed to paying down your debt without adding new balances to your credit cards, consolidation can provide a straightforward path to becoming debt-free. It simplifies your financial life and can free up cash flow for other goals.

Red Flags: When to Look for Another Solution

This strategy comes with one very serious risk: your home is the collateral. If you can’t make the payments for any reason, the lender could take legal action to foreclose on your property. That’s why it’s essential to be confident in your ability to handle the new loan payment. Another red flag is using home equity to cover day-to-day expenses or a consistent income shortfall. This can create a dangerous cycle of borrowing that makes your debt problems worse over the long term. If your income is unstable or you’re not disciplined with your spending, a home equity loan might not be the safest choice for you.

Ready to Apply? Here’s What to Expect in Ontario

If a home equity loan sounds like the right tool for your financial goals, you might be wondering what comes next. The application process in Ontario is quite straightforward, especially when you break it down into a few key steps. Knowing what to prepare and who can help you along the way makes everything feel much more manageable.

Get Your Documents in Order

Gathering a few key documents beforehand will make the application process much smoother. Lenders need to verify your income, property details, and existing debts. You’ll typically need recent pay stubs or tax documents (like your Notice of Assessment), your latest mortgage statement, and a recent property tax bill. It’s also helpful to have a list of the debts you plan to consolidate with current balances. You’ll need to know your home’s approximate equity—its current market value minus what you owe on the mortgage. You can also order a free copy of your credit report to ensure everything is accurate.

The Application and Approval Timeline

Once your documents are ready, you can begin the application. After you submit your paperwork, the lender starts its review, which includes verifying your information and arranging a property appraisal to confirm your home’s value. From approval to receiving your funds, the timeline is typically a few weeks. Lenders will look at your home equity, credit history, and income to make a decision. While some lenders look for at least 20% equity and a strong credit score, others offer more flexibility by looking at your full financial picture. You can get started in minutes with a simple online questionnaire to see what might be possible for you.

How a Mortgage Broker Can Guide You

You don’t have to go through this process alone. Working with a mortgage expert can make a world of difference. Instead of applying to different lenders one by one, a broker does the shopping around for you. They have access to a wide network of lenders and can find options that fit your specific financial situation. They’ll help you compare interest rates and terms to find a suitable offer. A broker acts as your guide, answering your questions and helping you with the paperwork from start to finish. This support is invaluable in finding the right home financing solution for your needs.

Related Articles

• Other Loan Options
• HELOC rates in Canada: complete guide for homeowners (2025)
• An Intro to Home Equity Lenders (With Rates, Terms, & Options)
• How to Get a Quote for a Home Equity Loan

Frequently Asked Questions

How will taking out a home equity loan affect my credit score? When you first apply, you might see a small, temporary dip in your credit score because of the credit inquiry. However, using the loan to pay off high-interest credit cards can actually help your score in the long run. It lowers your credit utilization ratio—how much of your available credit you're using—which is a major factor in your score. Consistently making your new loan payments on time will also build a strong payment history.

Can I still qualify for a home equity loan if my credit isn't perfect? Yes, you absolutely can. While a strong credit score is always helpful, it’s not the only thing lenders consider. The most important factor for a home equity loan is the amount of equity you have in your property. Many lenders are willing to look at your complete financial picture, including your income and overall assets, so a less-than-perfect credit history doesn't automatically close the door.

Is a home equity loan the same as refinancing my mortgage? They are two different approaches. A home equity loan is a second loan that you take out in addition to your current mortgage, leaving your original mortgage untouched. This means you'll have two separate payments. Refinancing involves replacing your entire existing mortgage with a new, larger one. A home equity loan is often a good choice if you're happy with the interest rate on your current mortgage and don't want to change it.

Do I have to use the funds for debt consolidation? Not at all. While consolidating high-interest debt is one of the most common uses, a home equity loan provides you with a lump sum of cash that you can use for any major expense. Homeowners often use these funds for large-scale renovations, to help pay for a child's education, to invest in a business, or to cover other significant life costs.

How long does the process take from application to receiving the money? The timeline can vary between lenders, but it generally takes a few weeks from the time your application is approved to when you receive the funds. The process involves a few key steps, including verifying your financial documents, getting a professional appraisal of your home's value, and completing the necessary legal paperwork. Working with a mortgage expert can help ensure everything moves along as efficiently as possible.