DEBT
CONSOLIDATION
The struggle to reduce debt is very real. Many Canadians feel the pressure of the increasing costs of goods, a weak dollar, and rising interest rates and it’s not surprising that the top financial goal of 2019 is to pay down debt.
Aside from budgeting and paying down high-interest loans first, another option for reducing debt is making it cost less and freeing up cash flow by making only one monthly payment through a debt consolidation loan. A debt consolidation loan is a lump sum loan that is used to pay off or reduce outstanding debts, such as credit cards. Once these debts are paid, you only have one monthly payment on the consolidation loan at a lower interest rate.
THINGS TO CONSIDER WITH A DEBT CONSOLIDATION LOAN
When applying for a debt consolidation loan through a bank or other lender, there are a few requirements they will ask for:
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History of consistent and stable income
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Current debt payments are in the range of 40 percent or less of your income
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You have a good credit score
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You have collateral to secure the loan
If you do not have collateral to offer, you can still get an unsecured loan from your bank or current lender. This loan is received as one lump sum that you will make one monthly payment on. While this can be a quick way to pay off other debts, it’s often the most expensive because there is no collateral securing the loan. The most common collateral to secure a loan is your home and there are a few ways you can use the equity in your home to consolidate your debt.
USING HOME EQUITY TO PAY DOWN DEBT
Securing a loan by using the equity in your home is called a home equity line of credit (HELOC). There are two types of HELOCs: a stand-alone home equity line of credit and a line of credit combined with your mortgage.
If you already have a mortgage and secure a stand-alone HELOC, it is often called a second mortgage. Your lender will loan you a set dollar amount up to a particular percentage of your home’s purchase price or market value. The amount loaned is set as a revolving line of credit meaning you will only have to pay interest on the balance owing. You can then use this amount to pay off outstanding debts and make single payments on the HELOC.
The second type of HELOC is part your mortgage. With this combination, you are financing part of your home through a fixed-term mortgage and a revolving home equity line of credit. As you pay down the balance on your fixed-term mortgage, the higher the amount you can borrow from your HELOC. While both options take advantage of the equity you have built in your home, make sure you’re taking with your broker or advisor first to ensure you aren’t taking on more debt than you can afford.
USING YOUR MORTGAGE TO PAY DOWN DEBT
When it’s time to refinance your home, talk to your mortgage broker or lender about combining your outstanding debts into your mortgage.
This option combines your current mortgage balance with other outstanding debt balances into one amount. If you have decided to refinance in the middle of the term, additional fees for early payouts may also be included in this amount. This will increase the current amount of the mortgage and you will likely have a higher monthly payment, but it will be amortized over a longer period of time with a lower interest rate. As a result, you will have increased cash-flow to make additional payments on your debt (or save for a vacation!)
TALK TO THE DEBT CONSOLIDATION EXPERTS
Paying down debt is one of the best financial decisions you’ll ever make towards living your best life. Debt consolidation can be a great way to getting you to your financial goals faster, but there are a few things to consider.
Have you addressed your spending habits? Can you afford larger monthly mortgage payments? How long will you be staying in your home? These are all questions we are here to help you navigate toward making your best financial decisions.