Published: September 8, 2018 • Last updated: November 16, 2020 at 9:56 am
Should you pay off your consumer proposal early?
Before you filed your consumer proposal, your debts were out of control. Your consumer proposal gave you relief from your creditors, collectors and perhaps even garnishments. It was a very responsible way to deal with your debts. Creditors appreciate that.
Once a new reality sets in and you have adjusted to a life of better budgeting and without credit, it’s time to take stock.
Maybe things are going really well!
Perhaps you actually have money left over for savings and discretionary spending. Something you have not experienced in a long time. In that case, you might consider paying off your consumer proposal early.
Or maybe things could be better still.
• Is the monthly proposal payment uncomfortably high? Are you finding it hard to get ahead still? Are you falling behind in essential expense payments like property taxes and utilities?
• Perhaps you are going to need to replace your car or do some home repairs. Maybe a vacation would be lovely.
And whether or not things are going well, your low credit score may feel like a heavyweight around your neck.
Those are some of the reasons why borrowers in a consumer proposal quickly come to realize their journey is not yet complete. The consumer proposal may have:
• Gained you immediate relief from your creditors, collectors, and garnishment actions
• Converted your debts into a five-year, interest-free loan for a mere percentage of the original amounts owing
• Reduced your crushing debt repayment load to a much smaller, single monthly payment
• Restored your standing with CRA
But now it’s time to wrap up the proposal and get on with your life.
Even though most proposals are initially structured as five years in duration, the folks at Hoyes Michalos say the average term to completion in their client base is 3.5 years.
When we meet people interested in paying off their consumer proposal early, we first determine if they are homeowners. The plain fact is that homeowners have more options available to them to pay off their consumer proposals early.
IF YOU ARE A HOMEOWNER
In most Canadian real estate markets, your home has been blessed with appreciating values over the past few years.
There is potentially lots of equity in your home. Why wait for the full five years to pay off your proposal??
Take some equity out of your home now; pay off the consumer proposal now, and get on with your life faster!
In most cases, your monthly cash-flow will improve! It often happens that the new mortgage payment is LESS THAN the monthly proposal payment.
• Your credit history will thank you! Now you can start the clock from your proposal completion date. With a simple, effective credit history rebuild program, track your credit score, and watch it rise each passing month.
• You might be able to free up an additional $$ to pay for home renovations, children’s activities or education, a new card, perhaps a family vacation.
• Your trustee (or administrator of your proposal) will thank you for this – they will earn their fees that much faster.
• Your former creditors will love you too – you just took away the uncertainty of proposal completion, and you also ensured they will get paid faster.
How is this even possible you may ask?
There are many misconceptions out there about consumer proposals. For example, clients have been told by others:
1. If you apply for a credit card before you complete your consumer proposal, your proposal will be cancelled and you will owe all the original debt all over again. NOT TRUE!
In fact, we strongly recommend you apply for a new credit card as soon as your proposal is approved in court. And within three months of that, we would like to see you get a second card!
2. No lender will consider giving you a mortgage while you are in a consumer proposal. NOT TRUE!
We specialize in helping homeowners refinance their homes while they are in a consumer proposal. In fact, we make sure you complete the consumer proposal as part of the refinance.
As with any mortgage transaction, the devil is in the details.
So you can expect we will ask for lots of information upfront, and we will need access to important information about your consumer proposal.
• Like who was your trustee and can we please have a letter confirming your payment history to date and your remaining balance owing.
• And we will need a complete copy of your creditors’ package – the one your trustee sent to all your creditors when you first filed for your consumer proposal.
• And we will present to our lenders what has changed since you first filed your proposal and how this is now an important step in the completion of your rehabilitation.
A REAL-LIFE EXAMPLE
Earlier this year we helped Jerome and Esmeralda pay off their consumer proposals early and pay off a huge private second mortgage. They were in a consumer proposal and their mortgage, proposal and credit card payments combined to $4,400 each month.
We first boosted Esmeralda’s credit score from 562 to 644, then we approved them for a single new first mortgage borrowing 80% of their home’s current value. And the new mortgage interest rate was a jaw-dropping 3.65%.
We saved them $2,000 EVERY MONTH with this mortgage. For the full story, you can read it here: Early payoff of consumer proposal a game-changer for Jerome and Esmeralda
In the past few years, we have helped dozens of homeowners who are in a consumer proposal. They really wanted to put their proposal behind them, and understand there is now sufficient home equity to do so.
Not many mortgage brokers specialize in this realm, as it requires skills and experience not only in mortgage brokering but specifically with alternative and private lenders. And it also requires a solid understanding of the world of trustees in bankruptcy, administrators of consumer proposals, and debt settlement in general.
Rather than turn tail and hide when someone approaches us with bad credit together with a current consumer proposal or even a past bankruptcy, we get excited, as this plays right into our strengths. We totally nerd out about helping you pay off your consumer proposal early. Really!
And it truly is a pleasure to help people who have become used to rejection by their bank and other traditional “A lenders”.
We explain they are about to take the first step in a journey back to respectable credit and “A lenders”. As such, it’s best if we all like each other as we plan to be by their side for the next few years at least, as the journey breaks down into a series of key steps.
1. WE ASSESS: we do a thorough assessment of the current situation. Review the current mortgage financing and develop at least two approaches towards taking equity out of the home to pay off the proposal.
This will either entail a brand new first mortgage, larger than the one they have now, with a new lender – an “alternative lender”, or…
It might be best to leave the current mortgage in place and approach a totally different lender to borrow new money – in the form of a new mortgage, called a second mortgage because it sits behind the first mortgage in terms of priority.
We do a sophisticated spreadsheet analysis for each client – looking at both approaches, factoring in all costs and benefits. In most cases, the correct solution jumps off the page.
For example, if the current first mortgage is fresh and would have a very large prepayment penalty if we break it, then chances are a new second mortgage will be the right approach.
2. WE PRESENT: we prepare a packaged presentation to one or two hand-picked lenders we know best suited for this particular applicant. Every lender has their “sweet spot”.
We understand which lenders will price best for different credit scores, or which lenders are more favourably disposed towards consumer proposal payouts, and which lenders are open to looking at non- conventional sources of income. We also know who to avoid and who to approach when the overall loan to value ratio is relatively high.
3. WE REVIEW: we secure the best result possible and review it with our clients. Assuming they are on board, we then quarterback the entire process – easy for us because we do this all the time. We are in touch with the trustee who administers the proposal; the real estate lawyers, the lenders and loan administrators, and the credit bureau reporting agencies, to make sure this all goes smoothly.
4. WE UPDATE: once the mortgage funds we are already planning the next stage of the process. We will update the credit bureaus to ensure they are aware the proposal has been paid off and to ensure they are reporting each tradeline accurately.
5. WE ADVISE: we will advise or arrange new credit facilities, if necessary, for our clients, to ensure they are re-establishing their credit history and rebuilding their credibility. We guarantee their credit scores will increase, and in many cases the increase is dramatic!
6. WE FOLLOW UP: we will touch base with our clients six months after, give or take, to ensure all is going according to plan; that any questions and new
developments are addressed, and to confirm the credit scores are going up, up and up!
7. WE MOVE FORWARD: typically after one year, but it can be more or less, depending on the clients’ unique circumstances, we are ready to take a bigger step forward.
This could be combining the new second mortgage and old first mortgage into one single mortgage at a decent rate of interest, or it could be renewing the existing single mortgage into better terms than were available the previous year.
These last two steps are repeated each year until our clients are right back to where they were in their salad days, before life and too much credit or CRA or whatever temporarily got the better of them.
ANOTHER REAL LIFE EXAMPLE
Justin came to us two years ago looking to pay off his consumer proposal early. The best solution was a private second mortgage and once this was done, Justin was able to pay off his consumer proposal completely and begin to rebuild his life.
One year later Justin wanted us to collapse his second mortgage into a new first mortgage. Like Jerome and Esmeralda above, we needed to refinance his home to 80% of its current value.
But his credit report was a mess – mainly from lots of reporting errors concerning his consumer proposal, and his credit score was only 497. No mortgage lender would give him a decent mortgage with that low score.
But Justin had followed our advice over the past year and had been diligently re-establishing his credit. Our teams launched a RUSH INVESTIGATION with Equifax and within three days, Justin’s credit score increased from 497 to 686 !!!
He ended up with the brand new first mortgage he wanted – for 80% of his home’s market value, and an interest rate of only 4.14% – Justin was super happy!
Above all, WE UNDERSTAND what you are going through with your consumer proposal. So if you or someone you know owns your own home and is either in a consumer proposal or thinking about doing one, talk to us now. We promise your next decision will be the right one.
IF YOU ARE NOT YET A HOMEOWNER
It is certainly possible to become a homeowner after paying off your consumer proposal. In fact, with a decent-sized down payment, some people buy a new home very quickly after they complete the proposal.
But if you are saving for a down payment and you hope to score a high ratio mortgage one day, you need to put some distance between you and your proposal completion date. At least two years. And you had better follow a smart credit history rebuild program at the same time.
If you wait the full five years before you complete your proposal, it may be at least seven years before you might qualify for a high ratio mortgage.
Naturally, we are always looking for ways to help you pay your proposal as fast as you possibly can. Save hard, work hard – consider a second job even. Look for family help – move back in with your parents if possible, and maybe even borrow from the bank of mom and dad!
RECENT REAL LIFE CASE
Katie was a twenty-eight-year-old who recently filed a lump sum proposal for $13,000. The trustee had suggested a lump sum would go over well with her creditors and they would probably accept less this way.
As soon as her proposal was approved, Katie’s parents loaned her the money to pay the proposal in full, and Katie will repay her parents over the next few years.
Doing it this way means Katie can immediately:
• Rebuild her credit history (she will have two unsecured credit cards within four months)
• Save aggressively towards her down payment
• Be in a position to qualify for a decent mortgage in two to three years.
Overall, that is FIVE YEARS faster than someone who takes the full five years to pay off her proposal.
As you can see, paying off your consumer proposal early is something worth doing. If you would like to understand your options, click here to reach us. You can even book a personal appointment with Ross.
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