Debt Consolidation Explained Clearly
Between piling bills, monthly payments to repay, and daily expenses, managing a mortgage can quickly become complicated. Most Canadians then look for a simple and effective way to reduce the weight of their debts. As a homeowner, your mortgage can become a real asset in this regard. XPERTO explains in detail how the equity in your home can simplify the consolidation of your debts through a complete guide.
What is debt consolidation?
Debt consolidation encompasses all the techniques used to combine several credits into a single debt. This new, larger loan is subsequently repaid in several monthly installments. Consolidating your debt by centralizing all your receivables offers several advantages. You thus avoid the risk of forgetting a periodic payment, as you only have one single monthly payment to make. Furthermore, the bank or financial institution that carries out the consolidation of your debts becomes your only creditor! By grouping all your credits together, you save on interest fees. The monthly payment to be made is lower than the sum of your old payments. Moreover, this operation does not affect your credit score.
Consolidation versus debt settlement
Debt consolidation and debt settlement are two distinct concepts. Consolidating your loans means contacting a credit union, a bank, or any other financial institution to benefit from a consolidation. The lending organization evaluates the request based on:
- your credit score,
- the mortgaged property,
- your monthly income…
It can approve your file or reject your request. Furthermore, it determines the interest rate at which you must repay your new debt. Debt settlement, on the other hand, involves presenting a formal offer to your creditors. This “consumer proposal” lays the foundations for repaying your debts by reducing the remaining capital owed and making a partial repayment without interest. However, it requires the intervention of a bankruptcy trustee. The consumer proposal is a solution to bankruptcy. However, both situations have a significant negative impact on your credit score.
Why consolidate debts with your mortgage?
Debt consolidation with a mortgage offers several advantages in managing your outstanding credit in Canada. At XPERTO, we offer this solution to benefit from 3 main advantages.
Lower interest rates
Unsurprisingly, consolidating your debts has the effect of reducing the cost of borrowing: the interest rate. You thus save a lot of money in the long term. Consolidating a debt with a high interest rate into a mortgage with a lower rate also results in lower monthly payments. You will then be able to repay your loan more quickly!
Debt consolidation improves your credit score
Canadians choose debt consolidation to significantly improve their credit score. With multiple outstanding credits, each of your accounts is mentioned separately in your loan file. For financial institutions, this picture gives a bad signal of indebtedness, hence the importance of grouping all your debts together.
The credit score generally determines the mortgage rate that will be assigned to you by lenders. For mortgage loans, the higher your credit score, the more access you have to attractive rates. In Canada, the minimum required is 650 points, with the best rates offered to Canadians whose score is above 740.
Why use refinancing?
The equity in your property is equivalent to the difference between the value of the home and the balance of the mortgage. It increases as you repay your mortgage and your property gains value. It is possible to use the equity of a property to obtain a loan or a line of credit. The latter allows you to group your loans into a single payment, similar to a mortgage. The main advantage of using this solution is the strength of your home’s guarantee.
Lenders are more inclined to grant a lower-than-normal interest rate for lines of credit. Furthermore, you benefit from a higher loan limit to centralize your high-interest credits. By opting for a home equity line of credit (HELOC), you can obtain up to 65% of the appraised value of your home. This is an interesting solution, especially if your property has a high value. In addition to flexible repayment options, refinancing allows you to:
- make tax deductions,
- pay only the interest on the funds used,
- repay your credits faster.
It is important to know that you bear no fees in case of early repayment.
The disadvantages of using your mortgage to consolidate your debt
The first obstacle to using your mortgage to consolidate your debts is the accessibility of this solution. The financing procedure is now stricter, especially if your credit score has been affected. On the other hand, lenders will hesitate to grant you this credit if your income is unstable or insufficient to guarantee proper repayment.
The second disadvantage of this procedure is the fact of putting your property up as collateral. While the real estate is a sufficient guarantee to benefit you from consolidation, its mortgage implies that you could lose your home in case of financial difficulties. Finally, it is possible that the bank grants you a mortgage that encompasses your outstanding credits even though your file does not meet its acceptance criteria. In this case, you might be required to provide a co-signer in addition to the mortgage. In other words, you must be comfortable with the fact that a loved one will have to face your debts in case of default.
The steps of debt consolidation with your mortgage
Like all banking procedures, the consolidation of your loans is done in several steps.
Contact a mortgage broker
Mortgage refinancing usually involves the intervention of an experienced broker like XPERTO. We play the role of intermediary, advisor, and negotiator to guide you through the consolidation process with personalized service.
During the first appointment, we analyze your financial situation to collect important information about your profile and your property. We then compare several offers to determine the one that best fits your needs. Our extensive network of contacts and our many years of experience allow you to obtain preferential conditions from financial institutions. By contacting a broker, you have access to many products to readjust your debt. All you have to do is choose the most advantageous offer and entrust the steps to this professional.
Obtain a pre-approval
The pre-approval request is free. It is done directly with the lending organization or through a broker. The person responsible for your file then checks the information it contains to ensure you meet the eligibility parameters. The documents to provide depend on the organization or intermediary through which the procedure is carried out. However, certain supporting documents are always part of this list to allow the lender to know your income, your assets, and your debt threshold. Documents likely to be part of the pre-approval file are:
- proof of employment or income,
- proof of identification,
- history with your employer,
- proof of the amount related to the down payment.
Information about your assets (car, house, boat, etc.) is also required by banks. The same goes for information on the debts and financial obligations you wish to consolidate. We suggest you prepare documents related to the balances of your cards, your lines of credit, or alimony you pay, as the case may be. Ongoing student loans, personal credits, and auto loans must also be mentioned.
Sign the refinancing contract
Once your pre-approval request is accepted, you must sign the mortgage refinancing contract. This is the final step of the process that allows you to obtain the necessary funds to repay all your unpaid debts. The loan obtained encompasses lines of credit, credit cards, and any other debt mentioned in your file. Once you repay your loans, you face a single debt split into monthly payments. The mortgage payment saves you money in the long term because it does not include interest on your old debts.
Questions to ask before accepting debt consolidation
Before consolidating your debts, we suggest you keep two recommendations in mind. The first is to ensure that the interest rate and repayment term of the new credit are reasonable and truly advantageous. The second recommendation is to ensure that you are able to pay the amount of the operation. This can be done by using our online calculator or by resorting to our team of mortgage brokers. Then ask yourself the following questions:
- Am I overwhelmed by the number of monthly payments I am facing?
- Am I paying a lot of interest on my debts?
- Do I have sufficient and stable income to satisfy the repayment of the new debt?
If you are accumulating, for example, several credit cards at a rate of 19.9% and you have assets paid for in part or in full, loan consolidation is probably the right solution! Having a good loan file is essential to benefit from this option. The reason for this condition is simple: refinancing is also a credit! Before granting it to you, the bank will want to know if you have had repayment difficulties in the past. Once your request is accepted, we recommend that you be disciplined so as not to create new multiple debts again!
Other options for debt consolidation
The classic procedure to rebalance your financial situation is not the only solution available to borrowers. XPERTO presents effective alternatives.
Credit card debt consolidation
This is a consolidation solution reserved for clients with balances on many cards with a high rate. They can consolidate or combine these amounts into a single, more affordable and manageable payment. One of the best approaches to achieve this is to transfer balances to a new credit card with a lower rate. It allows you to reduce interest fees to repay your debt as quickly as possible.
To benefit from this solution, ensure that the rate on your new card is lower than that of all your other supports. Furthermore, most cards charge fees for balance transfers. Make sure to choose a card that guarantees low fees and an interest-free period for new customers.
Private lenders
The solutions offered by financial institutions to resolve over-indebtedness are sometimes difficult to access. Private lenders constitute an interesting alternative, even though the credits they grant are also subject to admission conditions.
The criteria to benefit from a private loan are flexible, which increases your chances of benefiting from one. The debt ratio is higher than that of banks and is between 50 and 90% of the market value of your home. The credit score is relegated to the background: only your repayment capacity truly matters.
Resorting to a private loan allows you to collaborate with lenders who are aware of the urgency of your situation. The approval process is thus faster than that of traditional financial institutions. Each lender has its own verification criteria and is not required to follow the bank’s cumbersome administrative procedure. Private lenders have access to very significant funds and are able to transfer them to you quickly. You must, however, have the necessary repayment capacity to benefit from their services.