Published: December 17, 2019 • Last updated: January 6, 2021 at 6:41 am
Private Second Mortgage Erases Rapidly Accumulating Unsecured Debt, Keeps Pensioner From Losing Home
In my just completed 3-part series that detailed what a private mortgage is, when you’d need one and what they cost, I covered the mechanics — what you’d want to know if you’re in a situation where a private mortgage is necessary. In this heartwarming story that I saved for the holiday season, I add an epilogue that illustrates the human side of private mortgages — how this mortgage product gave a pensioner relief from an unmanageable debt load, and allowed her to continue living in her home which she was at risk of losing without a private mortgage solution.
Lara came to us a few months ago with over $75,000 in unsecured debts. She owns her own condo; but since she first bought it she has since retired from work, and relies solely on her government pension and OAS for income. After retiring, she fell into the common trap of dipping into her available credit facilities to supplement her income.
Unfortunately, once you accumulate high balances on your credit cards, they become a beast which needs to be fed each month as a result of high interest charges and minimum monthly payments.
It often happens that people who start down this path need to tap into their other credit lines in order to service the credit they have begun to use. Like a forest fire started with a small spark, the compounding effect can be quick and dramatic.High credit card balances can quickly become hungry beasts with growing appetites resulting from high interest charges and minimum monthly payments. #creditcards #debtload Click To Tweet
After two or three years of this, Lara was at her wits end. $75,000 in debt was choking her — the minimum monthly payment over $2,000!!
She could not keep this up any longer.
By the way, Lara has an excellent personal credit history. She has never had a late payment; so notwithstanding high balances, her score is respectable. She was wondering if a consumer proposal was the right solution for her situation.
But the answer to that question is NO.
The reason is her first mortgage is relatively small and she has almost $300,000 equity in her home.
A trustee assessing her circumstances could not offer her a consumer proposal as an alternative because she actually has a husky net worth, and is by no means insolvent.
How To Solve Lara’s Debt Problem
The obvious solution would be to sell Lara’s condo, pay off her debts, and either rent a property or buy a cheaper, smaller one.
Not surprisingly, Lara was very much against this.
She argues the monthly rent on a similar condo apartment would be far higher than she currently spends on mortgage, maintenance and property taxes. AND her rent payment would be helping her landlord pay off THEIR mortgage, not hers.If you've been in your home for a while, your mortgage payment will often be lower than the cost to rent an equivalent apartment, making a decision to sell or downsize difficult or uneconomical. #debtrelief #rentVSmortgage Click To Tweet
She wanted to avoid downsizing too — because she would be faced with real estate commissions on the sale of her condo, as well as land transfer taxes on the new condo. There may not be enough left over to pay off all her debts.
So… how did we keep Lara in her home AND rid her of the beastly debt?
The ASKROSS Solution: Re-Mortgage Lara’s Home To Eliminate All Her Debts
We decided to leave her current first mortgage intact — it will mature at the end of June 2021 – in one and half years. This way, there is no prepayment penalty AND no increase to her monthly mortgage payment.
Instead we arranged a special private mortgage for Lara – tailored to mature on the exact same date as her first mortgage. At that time, she can seamlessly combine both mortgages into one new one.
We knew cash flow is a concern for Lara, so this mortgage was structured so there is NO MONTHLY PAYMENT.
We made the mortgage loan amount large enough so that Lara can prepay the entire interest obligation right at day one. In fact, the mortgage covered ALL COSTS AND FEES. The net result being:
- $75,000 of unsecured debts paid in full. No credit facilities were closed — she still has them if she needs them in the future
- No more minimum monthly credit payments over $2,000
- Her first mortgage payment remained unchanged
- She has NO MONTHLY PAYMENT on the new second mortgage
This surprising result doesn’t seem like it should be possible, but there it is. Her monthly payments and cashflow are now sustainable, she avoids insolvency, and can breathe a sigh of relief. It’s a creative solution that wouldn’t have been possible with traditional mortgage products, but private mortgage lenders can be much more flexible in crafting solutions that match the requirements of the situation.
Lara will be able to live debt free once again, and in fact can start to save money each month. Most importantly, she gets to keep her home and not sell it off to rent and pay someone else’s mortgage.
If you’re curious about private mortgages and what you can do with them, my recent 3-part Private Mortgage series is a comprehensive trove of information that answers almost any question you may have. If you think you might need a private mortgage, and would like to discuss your situation with me, please click here to access my calendar and schedule a time to talk.
- Private Mortgage FAQs for Canada: What Is a Private Mortgage and When Would You Need One
- When Is a Private Mortgage the Best Solution?
- Alternative Mortgage Lenders Canada: Bad Credit, Private & Second Mortgages
- Private Second Mortgage Solved Big Problems
- Private Mortgages Save Day
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
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