What It Is, How It Works, and What to Know in 2025
If you’re living in Ontario and feeling overwhelmed by credit card debt, personal loans, or payday advances, you’re far from alone. Household debt across the province continues to climb, with rising interest rates and inflation applying pressure on even the most financially responsible families.
Debt consolidation is one of the most frequently discussed tools for regaining financial control — but confusion around how it actually works is common. Is it a loan? A strategy? A government program? And what does it look like when applied in real life?
This article breaks down debt consolidation clearly and factually. No pressure. No pitches. Just accurate, updated, FSRA-compliant information for homeowners and borrowers in Ontario who want to understand their options.
Whether you are researching solutions for the first time or re-evaluating an existing financial plan, this guide is designed to inform — not advise — in accordance with the standards set by the Financial Services Regulatory Authority of Ontario (FSRA).
What Is Debt Consolidation?
Debt consolidation is a strategy that combines multiple unsecured debts into a single loan or repayment arrangement. The aim is to streamline your finances, reduce the total cost of borrowing, and improve cash flow.
Instead of managing separate payments to credit cards, personal loans, payday lenders, or lines of credit, consolidation restructures those balances into a new product — ideally with more manageable terms.
It’s important to clarify: debt consolidation does not eliminate your debt. It reorganizes how you repay it.
In Ontario, there are four main types of debt consolidation:
Personal loans
Home equity-based products
Credit counselling debt management programs
Consumer proposals
Each of these methods comes with different qualification requirements, risks, and implications for your credit. Some involve new borrowing. Others are legal processes under federal law. Understanding the differences is key before making any decision.
Method 1: Debt Consolidation Loan
A debt consolidation loan is a personal loan used specifically to pay off high-interest debts. Once approved, the borrower receives a lump sum that is used to pay off other creditors. The borrower then repays the new loan in fixed monthly installments over a set term.
Key characteristics:
Generally unsecured, although some lenders may require collateral
Usually offered through banks, credit unions, or online lenders
Requires good credit and provable income
Interest rates vary based on risk profile
Terms range from 12 to 60 months
Pros:
Fixed monthly payment helps with budgeting
Can reduce interest if the new loan rate is lower than existing debts
Simplifies multiple payments into one
Cons:
Approval can be difficult with poor credit or unstable income
May require a co-signer
Missed payments could further damage your credit score
Origination fees or prepayment penalties may apply depending on the lender
Borrowers should ask for the total cost of borrowing and ensure that the lender provides all required disclosures under Ontario Regulation 191/08.
Method 2: Home Equity-Based Debt Consolidation
If you own a home and have built up equity, you may have access to more flexible consolidation options. Equity-based debt consolidation uses the value in your property to pay off unsecured debts, usually through one of three approaches.
1. Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured against your home. You’re approved for a maximum limit based on your equity, and you only pay interest on what you use. Most lenders offer variable rates tied to the prime rate.
HELOCs are best suited for borrowers with:
Credit scores above 680
Low debt-to-income ratios
Stable, provable income
Minimum payments are often interest-only, which keeps monthly costs low but extends the overall repayment period if principal is not repaid proactively.
2. Second Mortgage
A second mortgage is a lump-sum loan secured behind your first mortgage on title. It has a fixed or variable rate, a defined term (usually 1 to 3 years), and a fixed payment schedule.
Second mortgages are more accessible for borrowers with:
Lower credit scores (500 and up)
High existing debt levels
Need for faster access to funds
They are typically funded by private or alternative lenders and carry higher interest rates than HELOCs, generally between 10 and 14 percent.
3. Mortgage Refinance
Refinancing involves breaking your current mortgage contract and replacing it with a new one that combines your existing mortgage balance and additional debts into a single, larger loan.
This option often offers lower interest rates than a second mortgage, but you’ll need to:
Qualify under current lending guidelines
Pay any mortgage penalties for breaking your term early
Cover legal, appraisal, and administrative fees
Risks of Home Equity-Based Solutions
All equity-based borrowing products are secured by your home. If you fail to make payments, the lender can pursue legal action, including power of sale. If you’re interested in comparing a HELOC or second mortgage view the linked article.
Mortgage brokers and agents in Ontario must assess suitability, explain all fees, and disclose risks under Ontario Regulation 188/08 and 191/08.
Method 3: Debt Management Programs (Credit Counselling)
A Debt Management Program (DMP) is an informal repayment plan arranged through a licensed credit counselling agency. It is not a loan.
Instead, the agency consolidates your debts into one monthly payment and negotiates lower interest rates with creditors on your behalf.
Characteristics of DMPs:
You repay 100 percent of your debt, typically over 3 to 5 years
Monthly payments are made to the agency, which distributes funds to creditors
Interest is often reduced or eliminated, but not guaranteed
Available only for unsecured debt
Missed payments may void the agreement
Pros:
No borrowing involved
Avoids legal processes or bankruptcy
Can reduce interest costs significantly
Cons:
Not all creditors agree to participate
Appears on your credit report for up to three years after completion
May require upfront or monthly fees, even with non-profit agencies
Not legally binding on creditors who choose not to participate
DMPs are regulated by provincial consumer protection laws, but not overseen by FSRA.
Method 4: Consumer Proposal
A consumer proposal is a formal, legally binding process administered by a Licensed Insolvency Trustee (LIT). It allows you to settle your unsecured debts for less than the full amount owed, with protection from creditors.
How it works:
The trustee reviews your income, debts, home equity, and budget
A settlement offer is made to creditors, typically for 20 to 50 percent of what you owe
If creditors holding more than 50 percent of your debt agree, the proposal is binding on all
Interest is frozen, and creditors cannot pursue collection action
You make one monthly payment for up to five years
Important considerations for homeowners:
If you have significant home equity, creditors will expect your proposal to reflect that
Creditors compare proposal offers against what they would recover in a bankruptcy
Homeowners may need to refinance or access a second mortgage to strengthen the proposal
Proposals only cover unsecured debt — not mortgage debt, car loans, or other secured obligations
Joint debts and co-signed debts:
A consumer proposal only covers the filer’s obligations
If a debt is joint, the non-filing party remains fully responsible unless they also file
Pros:
Avoids bankruptcy
Reduces total debt obligation
Protects your home and other assets
Stops collection calls and legal action
Cons:
Significant impact on your credit score (R7 rating)
Remains on your credit report for 3 years after completion, or 6 years from filing
May not be accepted by creditors unless the offer is realistic
Must be handled through a Licensed Insolvency Trustee
Consumer proposals fall under federal law and are not regulated by FSRA. However, mortgage brokers are required to recognize when this may be a more appropriate option and refer the consumer to a qualified LIT, in line with their duty of care and obligations under Ontario Regulation 188/08.
How Does Debt Consolidation Affect Your Credit?
Different consolidation methods affect your credit in different ways:
A debt consolidation loan may improve your credit over time if payments are made consistently
A HELOC or second mortgage can help by reducing credit utilization if used responsibly
A debt management program appears on your credit report and may lower your score temporarily
A consumer proposal remains on your file for 3 years after completion or 6 years from filing
Credit is only one piece of the puzzle. The goal is to regain control over your financial life and avoid default or legal consequences. For some people, a short-term credit hit is worth the long-term recovery.
What FSRA Requires of Brokers and Agents
When a homeowner in Ontario seeks help with debt through mortgage or loan products, the agent or broker involved must be licensed under FSRA. They are required to follow strict conduct standards outlined in:
Ontario Regulation 188/08 – Standards of Practice
Ontario Regulation 191/08 – Cost of Borrowing Disclosure
Ontario Regulation 409/07 – Licensing of Mortgage Brokers and Agents
These include:
Performing a suitability assessment for any mortgage or loan product recommended
Explaining material risks, total borrowing costs, and conflicts of interest
Providing clear cost of borrowing disclosures in writing
Refraining from giving investment or legal advice beyond their licence scope
Referring consumers to a Licensed Insolvency Trustee when appropriate
Consumers should be given the opportunity to ask questions, review documents without pressure, and compare options before proceeding.
Signs It May Be Time to Consolidate Debt
You don’t need to wait until your situation is dire. Here are some common warning signs:
You’re only making minimum payments each month
You’re using one credit product to pay another
You’re receiving collection calls or legal notices
You have no savings and rely on credit to cover basic expenses
You’ve been declined for new credit or loans
Early intervention typically results in more options and lower costs.
Benefits and Drawbacks of Debt Consolidation
Potential Benefits:
Lower interest rates
Fewer monthly payments to track
Improved cash flow
Structured repayment plan
Possible credit score recovery over time
Potential Drawbacks:
You may need to put up collateral (your home)
Origination, broker, or legal fees may apply
Longer repayment terms can increase total interest costs
If spending habits don’t change, debt can return
Each method carries trade-offs. The right approach depends on your unique situation.
Next Steps: How to Get Informed Without Pressure
Debt consolidation is not a one-size-fits-all solution. The right method depends on your debt amount, income, credit score, assets, and overall financial goals.
Here are some next steps you can take:
Write down all your debts, balances, interest rates, and monthly payments
Create a basic monthly budget, including all sources of income and expenses
Order your credit report from Equifax or TransUnion
Speak with a licensed mortgage agent, financial advisor, or Licensed Insolvency Trustee
Ask for all fees, costs, and risks to be disclosed in writing before you make a decision
Final Thoughts
Debt consolidation in Ontario is a well-regulated space with multiple options. Whether you’re a homeowner with equity, a renter juggling credit cards, or someone nearing insolvency, there is likely a solution that can help.
But the process starts with information. No one solution works for everyone. And no reputable mortgage professional should push a product without a clear understanding of your needs and goals.
FSRA exists to ensure that your rights as a borrower are protected and that those offering debt solutions are held to the highest standard of transparency, suitability, and integrity.
If you’re unsure about your next step, take a breath. Ask questions. Get the facts. And take action only when you’re confident it’s the right move for you. Contact us today for professional advice.
