Published: October 31st, 2022 • Last Updated: September 20th, 2024
Author: Ross Taylor on AskRoss.ca

If you’re a homeowner who wants to get on top of their debts in today’s market, we generally offer 3 solutions.

Debt can weigh heavily on anyone’s shoulders, especially in a market where interest rates are high, and housing prices are through the roof. If you find yourself struggling with debt, you’re not alone.

The good news is there are several strategies which can help you manage or even eliminate that burden.

In this article, I’ll walk you through three possible solutions you should consider when dealing with an overwhelming amount of debt in Canada.

1. Can a private second mortgage offer financial relief?

A private second mortgage can be an appealing option when you’re feeling squeezed by debt, especially if you’ve got high-interest loans or credit cards eating up your income. If traditional lenders turn you away due to things like the Canadian stress test or high interest rates, private lenders may seem like the lifeline you need.

With second mortgages, the idea is to consolidate higher-interest debt, like credit card balances, into a loan with a lower interest rate.

For instance, credit cards typically charge 19-21% APR, while private second mortgages have rates ranging from 9.99% to 12.99%.

On paper, that looks like a win. For example, on a $100,000 second mortgage at 12%, you’re looking at around $1,000 per month in interest, compared to $3,000 in minimum payments on a $100,000 credit card balance.

Why you need a clear exit strategy for a private second mortgage

But here’s the catch—without a solid exit strategy, this quick fix can lead to long-term pain. Private mortgages are often interest-only, which means you’re not chipping away at the principal.

So while your monthly payments may seem more manageable, you could end up in the same or worse financial position down the road if you’re not careful.

A private second mortgage can provide relief, but you need a clear plan for how you’ll eventually pay it off. Always talk to a mortgage broker to see if this option is a good fit for you and your financial goals.

2. What does a consumer proposal do for your debt?

If your debt is less than $250,000, a consumer proposal is another strategy worth considering, especially if you’re drowning in unsecured debt like credit cards and personal loans.

This process is managed by a Licensed Insolvency Trustee (LIT), and it’s designed to help you repay a portion of your debt, often up to 80% less than what you owe.

A big plus with consumer proposals is that it freezes interest on your debts, giving you room to breathe. You’ll also see a significant reduction in your monthly payments, which can be a lifeline if you’re juggling multiple high-interest bills.

That said, a consumer proposal will impact your credit score, and you’ll be saddled with an R7 credit rating for up to six years on your credit report after you sign your consumer proposal.

Consumer proposals typically last for three to five years. However, there are ways to negotiate lump-sum payments, which can shorten the repayment term.

If you’ve recently come into some money, a lump-sum consumer proposal could be a game-changer for you.

Weigh the benefits and costs of a consumer proposal

A consumer proposal can offer significant debt relief, but it comes at the cost of your credit score. As always, speaking to an industry professional is the right move. I have assisted hundreds of clients with consumer proposal strategies and know the best way to minimize the length and fallout a consumer proposal will have on your credit report.

3. Should you sell your home to clear your debts?

This is the big one. Selling your home to clear your debts might sound extreme, but with today’s housing prices, it can actually be a smart move. Depending on where you live, your home might have appreciated enough to provide you with the financial reset you need.

By selling your home, you can use the proceeds to wipe out your debt, repair your credit, and even potentially re-enter the housing market once things stabilize. Yes, it’s hard to let go of your home, especially with so much emotion tied up in it. But in some cases, this option provides the cleanest and quickest financial reboot.

However, it’s essential to weigh this decision carefully. If your debts aren’t crushing you yet, other options like refinancing or a consumer proposal might be available to help you get back on track without losing your home.

Why selling your home might be a fresh start

Selling your home can feel like a drastic step, but for some homeowners, it’s the key to unlocking financial freedom and regaining control of their finances. Here are some key things you could accomplish by selling your home:

• Eliminate or significantly reduce debt: Use the proceeds from the sale to pay off high-interest debt, credit cards, personal loans, or even a second mortgage. This can bring immediate relief and free up cash flow for other important expenses.
• Rebuild your credit: By paying off your debts, you may improve your credit score over time. This gives you more borrowing options in the future and may lower interest rates on any loans or credit products you apply for later.
• Downsize to a more affordable living situation: You can choose to downsize to a smaller home, rent for a while, or move to a less expensive area. Lowering your living costs can help you manage your finances better and avoid future financial strain.
• Avoid foreclosure: If you’re struggling with mortgage payments and risk falling behind, selling your home before that happens can protect your credit from the lasting damage of foreclosure.
• Create a financial cushion: Depending on how much equity you have in your home, the sale could provide you with extra funds to save for emergencies, invest, or put towards future goals.
• Reduce ongoing home-related expenses: Homeownership comes with many costs like property taxes, utilities, maintenance, and insurance. Selling your home allows you to cut back on these ongoing expenses and focus on financial recovery.
• Opportunity to re-enter the market later: After selling and paying off your debts, you may be in a better financial position to re-enter the housing market later on, perhaps when conditions are more favourable, or when your financial situation is more stable.

Selling your home is a big decision, but for some, it’s the reset button they need to start fresh.

Advice from Ross Taylor Mortgages

Each of these options has pros and cons, and none of them should be taken lightly. Here’s what you should remember:

• A private second mortgage can consolidate high-interest debt, but without a clear exit strategy, it might only delay your financial issues.
• A consumer proposal offers significant relief on unsecured debts and can improve your cash flow, but it will affect your credit score for up to six years.
• Selling your home is a major step, but it could provide the financial reset you need.

When deciding which option is right for you, it’s crucial to consult professionals who can help you navigate the specifics of your situation. Whether that’s a mortgage broker (like me!) or a Licensed Insolvency Trustee, make sure you’re getting expert advice tailored to your needs.

Making the right choice for your financial future

No matter which route you choose, the key is to have a plan in place.

Debt doesn’t have to define your future, but finding the right solution now can make all the difference in how your financial story unfolds.

If you have any questions or want to explore your options regarding debt management, my wonderful team and I are here to help.

---