Debt consolidation always looks a good idea because you can roll up all the different high interest loans into a single package secured on your home. You have a good equity in the house being sold and the amount you’re paying for the new home will leave that equity largely untouched. Consolidating your existing personal debts into the mortgage loan can work well.

Even more important if the calculation shows that the consolidation is favorable is what you will do with the amount saved every month. The best possible strategy would be to use every cent of the savings to accelerate repayment of the mortgage. The first worst strategy would be to treat this a free money to spend as if there’s no tomorrow. The absolute worse strategy would be to take on more personal debt. The thinking goes: house prices always go up sooner or later. When that happens, I can do another debt consolidation and write off all this new debt with another cash out. When you’re in a collapsing property bubble, this is a very bad idea.

Alternatively, you have an equity in your existing home and decide either to refinance your existing mortgage to include personal debts or you take out a second mortgage. You pay off all your other debts out of the sale price and free more of your income with the reduced repayments. It depends on exactly how much interest you’re saving, the length of time you expect to stay in the house and whether you are expecting the value of the house to appreciate. Then there are the tax implications and the extent to which other costs may rise, e.g. the mortgage insurance premiums.

The first option is an unsecured personal loan. Most banks offer home improvement loans without having to tap into the existing equity. If you have a good credit score, approval is fairly routine with modest interest rates. Most loans will be agreed in instalments so you can draw down as work milestones are reached. Thus, if you’re buying a fixer-upper, you need only take a mortgage for the price for the land and structure as is. Later when the work is completed, you can decide whether to consolidate the personal loan into the mortgage.

Alternatively, if you have sufficient equity in the building as collateral, you can get a home improvement loan either as a second mortgage or as part of a refinancing deal to pay off the existing mortgage and take cash out for the improvements. As with a personal loan, you need to have comprehensive plans and estimates.

If you spend most of the loan on furnishings, these will depreciate in value through wear and tear. If you maximized the resale value, let’s hope you will have some cash left over after a forced sale. But if the resale value of your home has fallen too much, you may be looking at bankruptcy if you cannot pay off what is owing.