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CRA debt and too much unsecured credit

new year financial resolutionDear Ross, I make really good money running my own business, but the recession hit us hard, and we cannot seem to dig our way out of the debt we accumulated from 2008 to 2010. I owe Revenue Canada over $60,000 in back taxes, and we have over $120,000 in unsecured debt. Good thing is we have around $300,000 in equity in our home and a bunch of investments. Any advice?

This client was spending over $3,000 a month just to service his debts, and their mortgage was actually a home equity line of credit, so they were only paying interest on that, but the balance owing was not going down.

Their personal finances were quite complex, but at the end of the day, the solution to their problem was quite simple:

Refinance the house, taking the loan to value ratio back up to 80% from its present level of 60%. Use the additional $140,000 to pay off CRA and about 2/3 of the unsecured debt. Obviously, we would pay off the highest interest debt first. The clients felt they could then quickly pay off the remaining debt with their surplus monthly income.

There was one snag however. CRA had already put a lien on their property, and no major lender would touch this mortgage with that being the case. Doubly so because their personal credit scores were barely over 600, mainly as a result of the high balances on their available credit.

So we took a two-step approach to the problem. Initially I arranged an open, private mortgage for them, which they used to pay off CRA and lift the lien. We also paid off a good chunk of the unsecured debt.

We then waited two months for their credit scores to increase (to around 690) and then we applied for one single large first mortgage from an “A lender”. The lenders were now lining up to take on this mortgage!

So we paid off the private mortgage with no penalty, and traded in all that expensive debt (anywhere from 9% to 21%) for first mortgage financing at 2.99%.

We made sure the new mortgage has generous prepayment provisions, since with all the excess cash flow now coming into the house, the clients want to tackle their mortgage balance pay down as quickly as possible.

This was a great example of our firm using all our available resources to solve a client problem. Credit counseling, mortgage brokering and access to private capital made this possible. That and a smart client who was able to see the big picture and accept our proposal.

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Ross Taylor is a full-time mortgage agent and credit specialist who blogs frequently at ASKROSS

If you have any questions about anything financial, please contact Ross, he answers everyone personally.