Debt Consolidation Options

Debt relief can be overwhelmingly confusing for borrowers in all financial situations.
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Many borrowers have lingering debt problems… in fact, if you have a standard 25-year bank mortgage loan this can be considered, in many respects, a debt problem especially if you end up paying substantially more interest than you have to.

With the right advice from experts, borrowers can definitely choose one of many well proven and effective solutions to help them finally resolve their ongoing debt problems.

Finally, they can have more deserved reign over their hard earned money instead of designating it all to pesky compounding interest.

One particular debt problem that comes up over and over again for many borrowers is credit card debt. Canadians tend to have a lot of credit card debt and they often struggle to get out of it once the balances reach the maximum credit limit.

Here are three common debt solutions borrowers pursue:
a) refinance the first mortgage to consolidate debt. 
b) get a second mortgage loan like a line of credit or private mortgage loan or c) apply for a debt consolidation loan such as arranging a plan with the assistance of a third-party debt consolidation company.

To get out of credit card debt the quickest and cheapest way possible, borrowers have to follow some sort of plan that will allow them to pay their loan down much faster, with the least amount of interest involved and most importantly, in less time.

Let's look at the three most popular debt consolidation options borrowers can pursue:

Debt Consolidation Through Finance Companies

Consolidation companies will lend money to consolidate loans. The loans are usually unsecured meaning they are not registered against a property.

Their rates can be higher than secured mortgages and the terms can be very short (i.e 4 years only). As a result, scheduled monthly payments can be higher. Borrowers usually don't choose this option first since the payments can be higher on a monthly basis and therefore, not sustainable even over a shorter term.

A Second Mortgage or Line of Credit

A second mortgage can be a good option, but it depends on the interest rate a borrower receives, any additional fees involved and of course, whether or not they can manage the monthly payment.

Second mortgage loans tend to be offered at higher mortgage rates because they are considered riskier than a first mortgage.

A second mortgage loan can be offered by a financial institution, an alternative lender and a private lender.

A second mortgage offered by financial institutions, like first mortgage loans, usually has privileges built in that allows you to pay more principal faster. If the loan is a line of credit, then it is totally “open” which means it can be paid off at any time without a penalty.

Borrowers tend to fall into the "pay interest-only" trap when they take out a line of credit since, like a credit card, all that is required is a monthly minimum payment. If you don't pay more than just the lower interest payment, you may have a difficult time paying off the original balance.

It is often said that a secured line of credit can become the "credit card of the secured mortgage world."

Private loans: Expect interest rates to be much higher than banks or alternative lenders and to pay lender and broker fees which brings total cost of borrowing much higher.

Sometimes, however, borrowers choose a private mortgage as their best option because :
They can’t refinance their first mortgage because the penalty is too high or they don't qualify for whatever reason.

Pitfalls of Private Mortgages:

Borrowers pay interest-only, which is counterproductive.
Fees involved in a private loan can be very expensive.

UNDER NO CIRCUMSTANCES should a private mortgage be considered a long term debt solution.
Lastly... option three.

Mortgage Refinancing

Mortgage refinancing will involve breaking the existing first mortgage in order to consolidate all debts. Borrowers will have one monthly payment owed to one lender.

Borrowers may or may not have to pay a penalty. If they are able to stay with the existing lender, they may be able to simply increase the mortgage balance without a penalty.
In the event they cannot stay with the same lender for whatever reason, they will be subjected to a penalty.

Refinancing is often a popular choice mainly because the interest rates are the most favourable of all the debt consolidation options.

Additionally, most lenders allow a prepayment privilege each year of up to 25 percent of the original mortgage balance which can be used either by increasing the regular payments by a certain percentage or making one lump sum payment each year.

This can be advantageous especially when paying debts down. Instead of making that monthly, interest only mortgage payment, make the prepayment to your mortgage at a lower interest rate and your money goes towards reducing principal immediately.

There are other options one can pursue to help with debt consolidation such as transferring balances to promotional offers on credits cards but chances are, if one can’t get out of the current credit card debt they are in, they will have issues with other credit cards once the promotions are over and the rates go back up.

Looking to find the best mortgage rates? "Best" can be very misleading because rates offered to borrowers depend on many factors such as loan to value, employment situation and credit scoring. Contact me today if you have questions about your mortgage or debt consolidation matters!

Have a great weekend!

Sarah A. Colucci
Sr. Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680 

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