What's The Right Way To Consolidate Debt?

Posted in Debt Free In 30
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

debt consolidation

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Is Debt Consolidation Right For You?

On today's show we review Leigh Taylor's message about debt consolidation and high interest rates from a previous show and talk with licensed mortgage agent, Mark Moreau to get his take on loaning against your home.  Mark has worked in the financial services industry for 30 years and deals with a number of lenders in Ontario.  He talks about the process of refinancing a home through a secured line of credit or second mortgage and explains how to know when it's right to combine your debt into one monthly payment and when it's better to seek out other options.

Look At the Interest Rates Before You Consolidate

On a past show we featured bankruptcy trustee, Leigh Taylor to discuss smart ways to pay off debt. Part of Leigh's advice lends itself to today's topic and whether debt consolidation is right for everyone. Leigh warned that when considering whether to consolidate, you need to look at interest rates because

it isn't necessarily going to be at a lower rate of interest.  It may be over a longer period of time, but the interest rate is, generally speaking, going to be higher because you're a higher risk.

Instead of treating the problem, often a debt consolidation loan "has done very little except just put the problem off for a couple more years."  It's important to remember that debt consolidation does not reduce your debt, instead, it replaces several debts with one new debt.  Your total debt load stays the same, so it is up to you to make sure the finances work so that you are paying down that debt and solving the overall problem.

How To Refinance A House With Damaged Credit To Pay Off Debt

Mark answers this question by starting with what he calls "A borrowers" or people with good credit. For these individuals, the process of refinancing is fairly straightforward and can be done through a bank (A lenders).

For those with poor or damaged credit, although still possible, the process will involve more checks and documentation, and may need to be completed through a B lender that is willing to do some out of the box things to get you approved for a debt consolidation loan.

Mark explains that to start the process, the first step is to get the house appraised to know its true value.  Next, he would create a profile for the client, assessing whether they have good or bad credit to determine which type of lender they need to go through to re-finance the home.  The difference between what kind of lender you use lies in the urgency for debt consolidation.  Mark explains,

...if it's a self-imposed debt consolidation...if you've just decided that you've got too many credit cards, you want to address the situation but your credit's in great shape, then that kind of debt consolidation is really just an equity take-out.  And we can get that done at almost any bank.

However, if your thinking about consolidating your debt because of delinquency on your accounts and you're receiving collection calls, although possible, different strategies are needed.

Secured Lines of Credit

In our Let's Get Started segment of the show I ask Mark about the "new products" on the market when it comes to debt consolidation.  Mark explains that a lot of banks and lenders are pushing secured lines of credit right now in the form of a line of credit or a blended multi-product.  The good news about secured lines of credit are that it's an easy way for someone to access credit; on the flip side, it's not a one size fits all approach and depending on the type of purchase you're making, they could have negative implications for people looking to get a loan.  Mark provides an example asserting,

...buying a car over 30 years because you use your line of credit against your house doesn't make a lot of sense to me.

Moreover, these new secured lines of credit have a different interest calculation than a conventional mortgage and as Mark tells me "...the rates are a heck of a lot higher!"  He explains that,

the real danger that I see though is twofold, or maybe threefold, is that you get in a situation where you're kind of using your house as an ATM.  So, instead of the old world where we used to pay our houses down and we get to age 60 and we've got no more debt against the house, it;s part of our retirement package, that's great.  But with lines of credit, what we're starting to see is a trend that the house never really gets paid off.

The real issue facing Canadians is that they don't pay down these debts and instead, just keep reusing them; this is fine for someone who is inclined to pay more heavily than they borrow, but dangerous for creating and maintaining a cycle of debt.

For more information about debt consolidation, refinancing and secured lines of credit read the full show transcript here.

Resources Mentioned in the Show

Canadian Mortgage and Housing Corporation (CMHC)
Genworth Canada

About J. Douglas Hoyes

Doug is our co-founder and is a Licensed Insolvency Trustee, Consumer Proposal Administrator, certified Insolvency Counsellor and Chartered Professional Accountant.

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