There was a time when dad went to work, mom stayed home to raise the kids and they lived comfortably in a nice home and drove a reliable vehicle.
They worked hard as a family but lived within their means, and saved for all the special times and things they wanted.
But times have changed. Inflation has driven up the cost of living and our wages haven’t kept up.
Now both mom and dad work and still find it hard to keep their households in check, without going deeper in debt.
Then there are the other expenses that come our way:
- The furnace blows up
- The house needs a new roof
- The car breaks down
- The kids are ready for university (where did the time go…you were just a toddler yesterday)
Oh yes, and you work so hard you want to take a little vacation – just a week – to get rid of that stress you have been carrying.
Life just throws us so many curve balls – and the bad part is that we often don’t see many of them coming.
But when they do, we find ourselves using other means to pay for it other than savings.
And if you’re not too different than most other Canadians, as the stats appear to show, you have probably accumulated a large amount of debt and have probably wondered from time to time what you can do to get rid of it…or at least make it easier for you to make all those payments?
Your Options if You're Not a Homeowner
If you are not a homeowner, the best thing is for you to approach your bank to discuss a consolidation loan to lower the month payments and/or interest rate of your total debt.
If you have several high interest credit cards and other loans outstanding, you could combine those debts into one payment.
The process is as simple as an application with your lender, and once they have reviewed it, they will advise you of their decision.
But be warned, they will normally close all of the credit cards and loans that you are consolidating.
Your Options if You are a Homeowner
If you are a homeowner, the options for you are different.
While the concept is similar – combining your higher interest debt and loans into one payment – the debt can be rolled into your existing mortgage. This process is called a “refinance.”
You simply pay off your existing mortgage and create a new one by using the equity in your home – equity being the dollar value difference between the balance you owe on your mortgage and the value of your property.
Meet Ray and Sheila
So let’s look at Ray and Sheila’s fictional-but-realistic situation.
Their home is worth $500,000, with a current mortgage balance of $300,000.
They are paying 4.5%, monthly payment of $1,660.
But they have debt:
|Debt Type||Balance||Interest||Monthly Payment|
|Credit Card #1||$10,000||5.99%||$300|
|Credit Card #2||$5,000||19.99%||$150|
|Line of Credit||$15,000||8%||$450|
|Total||$55,000||N / A||$1400|
Altogether Ray and Sheila make mortgage payments of $1,660 and $1,400 for other debts = $3,060 per month.
They can borrow the $55,000 by using the equity in their home.
Based on a 3% interest and a 25 year amortization, the payment on their new $355,000 mortgage will be $1,680 – a savings of $1,380 per month in payments.
And while there is also the benefit of a large difference in interest costs – they no longer have higher interest rate debt and their mortgage rate has dropped – they are more so interested in being able to breath with a manageable monthly payment.
Refinance Your Mortgage to Access Equity in Your Home
The approval process for a refinance is similar to when you applied for your mortgage in the beginning.
The lender requires an application and will look at your income and assets, your credit, your debts, the current value of the home and the amount that you want to borrow.
With the recent Government changes, the maximum that you can borrow on any house you currently own is 80% of the current value.
When Should You Get Your “Financial House” in Order?
- You are a married couple considering children and looking to survive on a single income
- You are considering retirement where your income will drop from the salaried income you had as a wage earner to pension – and because you normally have a lower income in your retirement years, the amount you can borrow will also decrease
- You are considering self-employment where most lenders want a 2 year track record of your self-employment earnings before they will lend to you
- You have had too many of those roadblocks in life, and have more debt than you want or can handle
So while they may approve your application in principle, it is normal that an appraisal will need to be done on the property before it receives final approval.
The legal paperwork will be done by a solicitor (lawyer/notary) and while the fees can vary, here are some typical fees and average costs you would pay when you are refinancing:
- Appraisal fee – $300 to $500
- Insurance binder fee – $50 to $100 (ensures that you have property house insurance and that loss is made payable to the lender)
- Lawyer’s fee – $800 to $1000 (there is an additional cost of $50 – $100 for paying out each of the credit cards, loans, lines of credit debt that you are consolidating)
- Title search and title insurance – $250 to $350 (title search covers searching the property’s records to ensure that you are the rightful owner and to check for liens. Title insurance covers the lender against errors in the results of the title search)
- Prepayment fee – if you are breaking the term of your mortgage, the current lender will charge you a penalty or prepayment fee. These vary from lender to lender but are often determined by “the GREATER OF” either 3 months interest or Interest Rate Differential (IRD). Interest rate differential is the difference between the original interest and the interest rate the lender can charge today.
Best Advice? Don't Wait Until There's a Problem
Whether you are a homeowner or not, the most important piece of advice I could give you is do not wait until you are struggling with your payments to look at options.
If you are struggling, you may find it difficult to make a minimum payment on all your cards, so you miss paying one of them. The credit card company reports to the credit bureau that you are 30 days late on making a payment.
Next month, it’s a different card.
That card is then reported 30 days late.
Soon you are “robbing Peter to pay Paul” just to make minimum payments and it becomes more and more difficult.
Your credit report shows the late payments which can have an effect on your application.
Unless you are lucky enough to get a huge pay raise, receive an inheritance, or win the lottery, it will be a relentless never ending problem of trying to catch up.
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BC & Alberta Mortgage Broker
When I'm not breaking the knuckles of different lenders for better mortgages for my clients - I'm kidding (or am I?) - you can usually find me visiting with friends or family, writing for this blog, or doing my best to keep from capsizing a dragon boat!