Debt Relief Experts
If you’re carrying high-interest debt and own a home, using your home equity to consolidate what you owe can seem like a smart move. But what happens when you can’t qualify for a second mortgage — or the only offers you get comes with sky-high interest rates?
You may still have equity, but if you don’t have the credit score or income to access it affordably, a second mortgage could make your situation worse. In these cases, a consumer proposal — even one where you repay 100% of what you owe — may be the better solution.
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Using Home Equity to Pay Off Debt
There are three ways to use your home equity to pay off debt:
- Refinance your existing mortgage. When you refinance to pay down consumer debt, you replace your current mortgage with a new mortgage with new terms. Your lender typically gives you a cash lump sum which you use to pay off your credit card debt. The maximum amount you can refinance with a first mortgage is 80% of the appraised value of your home.
- Consolidate with a Home Equity Line of Credit. To avoid pre-payment penalties with changing the terms of your existing mortgage, you can consider consolidating debt with a home equity line of credit. A HELOC is a stand-alone line of credit secured against your home’s equity. The maximum loan-to-value ratio for a line of credit is 65% of your home’s value. This means you need much more equity in your home to qualify for a home equity line of credit.
- Second Mortgage Home Equity Loan. If you can’t refinance with your current lender, another option is to get a second mortgage using your home’s equity. You can borrow up to 90% of the market value of your home with a second mortgage. However, if you are using a higher-ratio mortgage and because second mortgages sit behind the first mortgage lender when it comes to payout in the event of default, interest rates are much higher on second mortgages.
Can You Qualify for a Home Equity Loan?
Not everyone qualifies for a traditional home equity loan. Even if you have enough home equity, lenders typically look at factors like:
- Your credit score
- Your income stability
- Your debt-to-income ratio
- Whether you can pass the mortgage stress test
If you fall short in any of these areas, you may still be offered a loan — but often through a private lender with high interest rates and fees. High ratio second mortgages often come with much higher interest rates — sometimes between 10% and 29% — plus added fees. That extra cost can erase any benefit you were hoping for.
Whether you’re denied outright or the cost of borrowing is simply too high, a second mortgage isn’t always the best way to deal with debt. The solution can come from a discussion with a Licensed Insolvency Trustee. Specifically, we can help you look at a consumer proposal as a viable option.
What Is a 100% Consumer Proposal?
A consumer proposal is not a consolidation loan. It is a negotiated repayment plan with your creditors.
Through a consumer proposal, you may be able to make an interest-free offer to your creditors. While this often involves paying less than you owe, if you have sufficient equity, your creditors may require a 100% debt repayment through the proposal.
This isn’t a discount — but it can still be a better deal than a high-interest loan.
- You make a fixed monthly payment – no surprises or rate increases.
- You don’t need to borrow more money or deal with lender conditions.
- You keep your home and other assets.
- You don’t pay any interest.
- Collection calls and legal actions stop as soon as the proposal is filed.
Certain aggressive creditors, if they make up the majority of your debts, may also ask you to increase your proposal payments enough to cover government filing levies, credit counselling and trustee fees deducted before they receive any funds from your proposal.
How a Consumer Proposal Treats Home Equity
If you’re a homeowner, your equity matters — even in a consumer proposal. While a proposal doesn’t require you to sell your home, your creditors will expect to be repaid at least as much as they would receive in a bankruptcy, where your share of home equity could be used to repay debts.
Here’s how it works:
- You don’t lose your home in a proposal — you keep it, just like in a refinancing.
- But creditors still consider your available equity when reviewing your offer.
- If you have more equity than debt, your creditors will likely expect a 100% repayment proposal — meaning you repay the full amount you owe (but still interest-free).
This is a fair compromise: you protect your home, avoid high-cost borrowing, and eliminate your debt without interest or new loans.
Let’s look at an example:
Jonas owes $50,000 in credit cards, payday loans, and tax debt. He has about $65,000 in home equity but a poor credit score, so he doesn’t qualify for a second mortgage with a bank. A private lender offers him a second mortgage at 14% interest — which would cost him over $900/month and $17,000+ in interest.
Instead, Jonas files a 100% consumer proposal: $50,000 paid over 60 months, at $835/month — no interest. It’s the same principal, but he saves thousands in interest and avoids putting his home at risk.
Why Would I Pay 100% If I Can’t Get a Loan?
It may seem strange to repay 100% of your debt through a consumer proposal if you’re already struggling. But even without a discount, a proposal can still be the smarter and safer option compared to borrowing through a high-interest second mortgage.
Here’s why:
- No new loan. You’re not taking on more debt or dealing with lender fees and loan conditions.
- No interest charges. Every dollar you pay goes directly toward your debt — not toward servicing interest.
- Fixed monthly payments. Your payments stay the same throughout the proposal, with no surprise increases.
- Legal protection from creditors. As soon as your proposal is filed, collection calls stop and wage garnishments are halted.
Even in a 100% repayment scenario, you’re paying off debt on your terms, not theirs — and keeping your home out of the equation.
When to Consider Each Option
A Second Mortgage May Be Better If:
- You qualify for a low interest rate through a bank or credit union
- You have enough equity to pay off all your unsecured debt
- You’re confident you can afford your mortgage payments over the long term
- You don’t want the credit impact of a proposal
A Consumer Proposal May Be Better If:
- You need lower payments to make your budget work
- You want to stop collection calls or wage garnishments
- You can’t access your equity (either your loan was denied or it’s co-owned and you can’t refinance)
- You’ve been offered high-interest borrowing from a subprime lender
- You want a fixed, interest-free path to being debt free
- You don’t want to risk losing your home if your situation worsens
Final Thoughts
Both a second mortgage and a consumer proposal can help you consolidate debt — but they carry very different risks and long-term consequences. A proposal isn’t just for people who owe more than their home is worth. Even if you repay 100% of what you owe, it can be a way to leverage your home equity for debt relief when traditional mortgage options fail.
A Licensed Insolvency Trustee can walk you through both choices and help you decide what’s best based on your income, equity, and goals. We’ll never push you into one option or the other. Our job is to help you make the decision that fits your financial situation. Contact us today for a no pressure, no judgment, free consultation.
