When debt begins to pile up, there’s only so much you can do to stay ahead. In times like these, it just takes one letdown or one slip before you find that your finances are circling the drain.
This is a common scenario for millions of Canadians, so there’s no need to feel guilt or shame when help can be on its way with a home equity loan. With debt consolidation, it’s possible to decrease your monthly payments by combining the loans under a better interest rate, and it might be as easy as refinancing your mortgage to consolidate debt
But a debt consolidation loan is not a silver bullet. Payments will still be required, and you will likely have to pare down your spending to get back in the black. Here’s everything you need to know about debt consolidation in Canada.
What is Debt Consolidation?
Debt consolidation is the practice of taking out a loan to repay all of your debt so all you owe is the repayment of that loan.
The benefit is that it’s often possible to find a loan with an interest rate that’s lower than your other lines of debt, which will decrease your monthly payments and, ultimately, the amount you owe.
Student loan debt, credit card debt, and other liabilities are common sources of stress and financial burden. Once creditors become involved, things can become even more stressful.
However, consolidating your debt into one loan can have a positive psychological effect that could prove to be empowering and uplifting.
Debt consolidation is ideal for those who are unable to pay down their debt with their current income rates and for those who have high-interest rates on their debt.
What You Can Do to Consolidate Your Debt
If you own your own home, a mortgage broker in Vancouver can help with debt consolidation. The benefit of these types of loans is that you can have a large sum of money available in a short amount of time.
In a way, the money really is already yours, as if it were sitting in an investment account. But instead, it’s just tied up and can be accessed by refinancing mortgage to consolidate debt.
Home Equity Loan
When you meet with a mortgage broker in BC, they can get you started right away on a home equity loan to potentially be approved within 24 hours.
To refinance a mortgage to consolidate debt, you withdraw some of the equity you have built up in your home through your mortgage repayments and turn it into cash. The bank is essentially buying back some of your home, which you will have to repay, like with a mortgage.
The great thing about a home equity loan for debt consolidation is that homeowners can withdraw up to 80% of their home’s value in urban centers and 65% elsewhere. This means that if your home is valued at $1 million, you could potentially receive a loan for as much as $800,000.
There are also very flexible repayment options for refinancing mortgages to consolidate debt, including interest-only payments and loan amortization of up to 40 years.
Even if you have amassed a low credit rating due to defaulting on your debt, and even if your debt has gone to collections or you have had to declare bankruptcy, there are still flexible options for you.
A reverse mortgage works similarly to a home equity loan, but this option is only available to homeowners over the age of 55.
With a reverse mortgage for debt consolidation, homeowners can borrow up to 55% of the value of their homes.
But the best part of a reverse mortgage is that you don’t need to pay any monthly fees. Interest will still be accumulating on the loan even if you have arranged not to have a monthly fee, but it can be subtracted from your equity in the home when the homeowner moves, sells, or passes away.
What’s more, if there’s more than one homeowner, a reverse mortgage does not come due until all owners have moved away, sold the home, or passed away.
The Pros and Cons of Refinancing Your Home to Consolidate Debt
Using the equity built up in your home to repay debt is a smart move. That being said, it’s still important to have all of the facts.
- Interest rates for home equity loans are often lower than interest rates on credit cards and other forms of debt.
- The approval process can be quick and painless.
- Your application won’t be contingent on a good credit rating since this is a secured loan, using your home as collateral.
- The amortization horizons for these types of loans can be much longer.
- You will be using up the equity of your home. When you go to sell or for someone to inherit the home, there will be less of a cash stake.
- You may require a home appraisal.
- If you default on a loan where you’re using your home as collateral, the consequence could be losing your home.
- You must keep your home in good condition.
What Else Can You Do to Consolidate Your Debt?
When it comes to debt consolidation in Canada, there are eight common pathways, which include:
- Debt consolidation loan
- Home equity loan or refinance mortgage to consolidate debt
- Line of Credit
- Moving everything to one credit card
- Debt management programs
- Debt settlement
- Filing a consumer proposal
- Borrowing money from loved ones
Unfortunately, debt needs to be repaid somehow. Fortunately, your neighborhood mortgage broker in Vancouver is available to help refinance a mortgage to consolidate debt or with home equity loans.
If you’re under undue hardship as a result of debt and you own your own home, give us a call – we’d love to help shoulder some of the weight with you.