The biggest misunderstanding about debt consolidation: a lower monthly payment is not the same as saving money.
Why it happens
Total interest depends on two things: the rate and how long you carry the debt. Consolidation lowers the rate, but rolling a card balance into a 25-year mortgage can stretch it from a few years to decades.
An illustration
Round numbers, for illustration only: $40,000 at about 20% paid off at $1,000 a month costs roughly $26,500 in interest. The same $40,000 at 6% over 25 years costs roughly $37,000 in interest, despite the much lower rate. See the full example.
How to keep the savings
- Keep paying close to what you paid before. Direct the difference to the mortgage as a prepayment or higher payment.
- Use a shorter amortization on the consolidated amount, if your lender allows a separate portion.
- Make annual lump-sum prepayments within your mortgage’s privileges.
- Track the consolidated amount as its own goal.
See paying off consolidated debt faster.
Watch the amortization when you refinance
When you refinance, the lender may reset your whole mortgage to a 25- or 30-year amortization. That lowers the payment on your original mortgage too, not just the consolidated debt, and adds years of interest on both. Ask to keep the amortization close to what you had, if you can afford the payment.
A simple habit that works
Set your mortgage payment at the new amount plus the difference you’ve freed up, or set up an automatic extra payment the day after payday. If the money never lands in your chequing account, it’s much easier not to spend it.
Ask for both numbers
When you get a consolidation quote, ask for two figures: the monthly payment, and the total interest you’d pay on the consolidated amount if you only made that payment. Then ask for the total interest if you kept paying what you pay now. Seeing them side by side makes the choice clear. See the costs.
When a lower payment is the right goal
If cash flow is the emergency, such as after a job loss, lowering the payment can be the right first step. Just plan to increase payments once things stabilize.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.