Debt Consolidation Strategies

In a world that continues to be dominated by a global pandemic, many Canadians are struggling with the reality of layoffs, reduced wages, rising living costs and credit dependency. If you’re feeling overwhelmed with your financial obligations, you may want to consider using the equity in your home (the difference between the home’s value and your outstanding mortgage balance) to consolidate debt, which empowers you to save money and improve your cashflow. 

In today’s low interest rate environment, and with your home serving as collateral, consolidated payments allow you to efficiently eliminate debt as well as the stress and burden it bears. There are a number of options available, so it’s important to find the one that works best for you. 

Mortgage refinance

One of the most common ways to consolidate debt using your mortgage is through a refinance. This involves breaking your current mortgage agreement and rolling your outstanding debt into a new one, resulting in one easy payment, usually at a lower interest rate. Your outstanding mortgage balance will be higher, but you’ll have peace of mind knowing that your debts are repaid. Typically, your lender will arrange to pay your creditors on your behalf. There may be a financial penalty for breaking your existing mortgage early, however, but it could still be advantageous to do so in order to pay off your higher interest debt right away.

Home equity line of credit (HELOC)

Another way to alleviate financial struggles is through a HELOC, which is a line of credit using your home’s equity as security that you can draw from for debt repayment. Unlike a loan, you don’t receive all of the funds at one time but, instead, and not unlike a credit card, you access as much as you need and only pay interest on the amount withdrawn. As you make payments, the credit revolves and becomes available for you to use again. And because the credit is secured by your home, the interest rate is lower than what you would pay on an unsecured loan. Since you’re only required to make interest payments on the money borrowed, however, it’s important to have a repayment plan in place so you’re not continually paying interest.

Home equity loan 

Similar to other types of loans, a home equity loan provides you with a one-time lump sum based on your available equity, which you can then use to repay your debts. Depending on your available equity, the amount you can borrow could potentially be much higher than with a personal loan. Similar to a HELOC, your home is used as collateral and, therefore, the loan itself carries less risk and lower interest than other loans. You’ll have a structured repayment plan over a set period of time and, with each payment made, you’ll reduce the balance as well as the interest, which is usually at a fixed rate. 

Reverse mortgage 

A reverse mortgage allows Canadian homeowners aged 55 and older to borrow against the equity in their home. This type of financing doesn’t require you to make regular monthly payments like you would with a traditional loan, which frees up money to then be used towards debt repayment. A reverse mortgage is only paid back when you sell or leave the house and, although interest rates tend to be a bit higher than with a traditional loan, they’re offset by the fact that repayment isn’t required until the loan comes due.

Once you’ve used a debt consolidation strategy, it’s important not to fall back into a habit of over-extending your finances or racking up credit cards simply because they’ve been paid off. This is your chance to wipe the slate clean and work towards financial freedom so you’ll be well prepared for what lies ahead.  

Have questions about consolidating your debt? Answers are a call or email away!