Research shows that Canadian homeowners tend to have more debt than non-homeowners. Racking up debt with credit cards or your mortgage influences your credit rating, impacting your approval odds for future loans. Fortunately, options such as debt consolidation for homeowners can help you control this debt before it gets out of control.
Learn more about your options below, and contact a mortgage broker through Mortgage Brokers Network to receive expert help.
Debt Statistics in Canada
In 2020, the debt-to-income ratio averaged 158.2 for Canadian households. This statistic means that for every dollar of disposable income, households owed $1.58 to lenders. Data from the Canada Mortgage and Housing Corporation shows that COVID-19 has impacted how Canadians borrow and treat debt.
Your level of debt directly relates to your level of vulnerability to economic changes. These changes can include:
- the housing market crashing
- shifts in consumer spending
- changes in the prices of goods
You are also more vulnerable when it comes to personal changes. If you lose your job or experience an increase in your interest rates, you may not be able to pay off your current loans. Circumstances like those can create a snowball effect and push you deeper into debt.
Debt’s Affect On Credit Ratings
When you need to get another loan or refinance your mortgage, lenders will use your credit score to calculate your worthiness. Credit reports provide information about:
- whether you’ve filed for bankruptcy
- whether you’ve had payments go to collections
- any missed or deferred payments
- the total of your current debt
Missing payments on your current debt will cause your credit score to decrease. With a low score, traditional lenders may charge you higher interest rates on new loans. Or, they may deny you a loan completely.
Ways to Manage Debt
Homeowners need to be smart with money and plan for the future. Here are a few options you have to manage your existing debt.
Find Out What Your Creditor Can Do
If you owe money to a credit card company, they may work with you to find an appropriate plan. Some companies offer relief programs for severe hardship or opportunities such as reduced interest or flexible payments.
If there is no relief program, try to bargain for a lower interest rate. Card companies may approve this suggestion if you have a solid credit score or your score has increased since you applied for the card.
Make A Plan
Do the best you can to pay off the minimum amount you owe on time every month. While you won’t make a massive dent in your debt, you’ll prevent late fees from accumulating. You will also prevent negative dings on your credit report.
For circumstances where you owe money on more than one account, find out which debts you should prioritize. Consider paying off the accounts with the highest interest rate. These accounts cost you more money in the long run, and overdue balances will add up quickly.
For help making a financial plan, try to find a professional debt counselor. These experts can help you look at your finances and pick the best path to pay off debt. They may even offer negotiation services to speak with creditors for you.
There is often a small fee to make a plan with a counselor. However, you may be able to find free help from a nonprofit or government assistance program.
Refinance Mortgage or Get a Home Equity Loan
One advantage that you have as a homeowner is the ability to take out a home equity loan when you’re in a bind. Also called a second mortgage, these loans are based on your property and not your personal financial record. You must have some equity in your home before you can borrow this money. Debt consolidation for homeowners is one of the most cost-effective remedies available in Canada.
Since your house is collateral, home equity loans allow you to get lower interest rates and borrow more money than many other loans. You can use the money from your home equity loan as a debt consolidation loan.
Debt consolidation means that you take multiple debts and turn them into one monthly payment. This way, you can pay off high-interest debts and repay them at a fixed interest rate.
In addition to credit card debts, you could consolidate student loans, car loans, or other personal loans.
More on Debt Consolidation
Some people choose to consolidate their debt by getting a low-interest credit card. If another credit card isn’t an option, then your home equity loan can get the job done. You can take out this loan with a set term to pay it back, so you know exactly when you’ll be in the clear.
Debt consolidation for homeowners using home equity works best if you:
- do not run up more debt in the meantime
- have enough income to make your payments
- have been loans by other financial institutions
If you’d rather not take out money against your home, you can seek out a loan from debt consolidation companies. Make sure the loan terms are better than your current ones. By paying your new loan on time, you can help increase your credit score.
Debt consolidation is not always necessary. For example, if you have a debt load and you can pay it back within a year, you won’t save a lot of money by consolidating.
It is also important to address the behaviors that got you into debt in the first place. Continuing negative spending habits after consolidating your debt will not help your situation.
Talk To An Expert
The Mortgage Brokers Network is here to help you consolidate your debt. We have access to more than 50 lenders, and we know how to get you approved for a loan. We’ve helped countless clients get a debt consolidation loan to consolidate credit card debt, pay off personal loans, and more.
Complete our quick online application today to explore our full range of financial services.