Let’s talk about debt consolidation for Toronto and GTA Homeowners. This is where we turn several debts into one low monthly payment. But is it really possible or even worth it? Watch the video below to find out! You’ll also learn 3 ways to reduce your monthly payments, and how to determine which option is right for you.
First of all, there are many ways to consolidate debt. And you should always do your research to find out if it’s right for you.
That being said, in this episode we will only be talking about options available to homeowners. Because as a homeowner, there may be a better way.
What is Debt Consolidation?
It’s basically where you combine multiple debts into a single monthly payment. These debts can include: high interest credit cards or department store cards, pay-day loans, arrears in property tax, and other personal loans.
Debt is not eliminated
First, let’s make something clear. You may have seen ads with the headline: “eliminate debt with a home equity loan!” This is, of course, incorrect! Debt is not eliminated! In fact, if you see such an ad, you should probably avoid it for that reason!
Debt is not eliminated. You still owe that money!
Improve Your Cash Flow
Also, contrary to some ads I’ve seen, in some cases it may not even save you money in the long term. The way you should look at it is this: The primary purpose of Debt consolidation is to make it easier to manage your monthly expenses by restructuring your debt into a more affordable monthly payment. It basically improves your cash flow and gives you some breathing space.
Let’s say, for example, that a homeowner has several Credit cards totaling: $25,000 @18%, with a minimum monthly payment of $750.
They also have a personal unsecured loan of $10,000 @27%. the monthly payment is $305.35.
So the total monthly outlay is $1,055.35.
Instead, they consolidate all the debt @3%. The new monthly payment is reduced to $165.64. Now that’s a drastic drop! How’s this even possible?
The Reality of Bad Debt
Just a couple of things to keep in mind:
First, paying the minimum on these credit cards would take 27 years and 9 months to pay off.
Secondly, It’s not uncommon to see personal unsecured loans with interest rates as high as 30 or even 60%. There are some places that make it way too easy to borrow money. So Consumer beware!
Debt Consolidation Case Study
Back to our case example, how did we achieve a significant reduction in the monthly payment? By using home equity. Home equity is the difference between what your property is worth and what you owe on it. If your home is currently worth $1,000,000, for example, and your mortgage balance is $750,000, then you have $250,000 of equity.
If you’ve owned your home in the Greater Toronto Area for more than 5 to 10 years, chances are you have equity in your home. Send me a message and I’d be happy to help you estimate the value of your home using our database system.
Using the equity in your home may offer the opportunity to refinance at a lower interest rate. This is because the loan is secured as a mortgage on your home. After all, It’s a much safer bet for the bank or lender.
3 Debt Consolidation Options Available to Homeowners:
- Mortgage refinancing
- HELOC (Home Equity Line of Credit)
- Second Mortgage
There are pros and cons to each, but which one is actually available to you will depend on several factors, as will be discussed.
1. Mortgage refinancing
This is where you can potentially reduce your monthly payments the most. The idea is to combine all your debts with your existing mortgage.
Remember in our example where the homeowner has $35,000 in debt and a monthly payment of $1,055.35?
Let’s say this person owns the home in Toronto valued at $1million, and has a mortgage of $750,000. If the rate on their current mortgage is 2.5%, they’re currently paying $3,359.75 monthly. Their total monthly payments therefore is $4,415.10.
What if we combined both debts by refinancing the mortgage?
(old mortgage) 750k + (debt) 35k = the new mortgage would be $785,000.
Now, rates have dropped recently. At 1.64%, the new mortgage payment would be $3,189.32.
That’s a difference of $1,225.78! A massive difference!
This makes sense, as we’ve converted very high interest to a much lower interest debt.
So the pros:
- You can take advantage of low interest rates today to refinance debt and your mortgage
- You do not have to stay with your bank. You can shop for the best rate and terms.
- And, You have the Potential for maximizing cash flow
The cons:
- It’s harder to qualify: you generally need excellent credit and steady income
- You can only refinance up to 80% loan-to-value. Meaning your new mortgage cannot exceed 80% of the value of your home
- Also, check with your bank first, as there could be penalties associated with breaking your current mortgage. And if there is, do the math to see if it’s worth it. If not, there are other options, as in…
2. HELOC or Home Equity Line Of Credit
Simply put, this is a line of credit that is secured by your home. Your existing mortgage remains intact. So that puts this in second position. It is also referred to as a revolving credit with a variable interest rate. Think of it as a “giant credit card”.
Despite that, here are the pros:
- Low interest rate, although not as low as refinancing your mortgage
- And again, in many cases, you do not have to stay with your bank. You can shop for the best rate and terms.
- Also, there are solutions available even if your credit is less than perfect.
The cons:
- It requires that you have a steady income and acceptable debt service ratios
- You can only refinance up to 80% loan-to-value.
- And, It’s a revolving credit. Meaning, if you don’t have sufficient discipline managing your credit, you may be stuck paying the interest for time indefinite.
3. A Second mortgage
As with a HELOC, a second mortgage sits in second position, and leaves your current mortgage intact. It is generally a fixed-payment with a fixed interest rate.
The pros:
- Income and credit are generally not an issue. Your home equity is your main qualifier. (Which is good if you need a short term solution, while you rebuild your credit)
- Funds are available very quickly for emergencies (sometimes within 24hrs)
- You can borrow up to 85% loan-to-value, which is more than a HELOC
The cons:
- Payments are interest only. Which means, even though your monthly payments can be significantly reduced, you still need to work on a debt repayment strategy.
- And, It’s only a short-term solution. Terms are typically a maximum of 12 months.
That being said, with a well managed plan, this can help you get back on track. And possibly at the end of the term, once your credit has improved, you can refinance the mortgage (as per option 1)
Every option has a purpose and is suitable for different needs
Where do you fit?
Navigating the mortgage market can be a little overwhelming.
After all, you want to find the most suitable solution.
Whatever your situation may be, I’d be happy to help. Visit alternativemortage.ca to learn more or to book your free discovery call. Be sure to check out my YouTube channel for more informative videos about mortgage financing.
