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Published: September 8th, 2018 • Last Updated: January 22nd, 2022
Author: Ross Taylor on AskRoss.ca
If you are a homeowner in the middle of a consumer proposal, did you know you can get a home equity loan or mortgage refinancing to pay off your consumer proposal and get on with your life?
There are several reasons why you might do this:
- Keep more of your pay every month. Your overall monthly expenses will almost certainly go down dramatically when you eliminate your consumer proposal payment and absorb it into your overall mortgage financing.
- Rebuild your credit score. Once you complete your consumer proposal, you have taken a huge step towards increasing your credit score and returning to favoured status with society. This can really make a difference as everything is harder when your credit score has taken a beating.
- You need money for some other purpose. For example, a home renovation, a wedding, a vacation or a child’s post-secondary education. If you want to tap into your home equity for one of these reasons, you will be required to pay off your consumer proposal at the same time.
- Protect your family at mortgage renewal time. It seems to be happening more often these days where mortgage lenders might not renew the mortgages of borrowers who included the bank’s credit cards and lines of credit in a consumer proposal or personal bankruptcy
How to use your home equity to pay off your consumer proposal
Assuming you do not wish to sell your home, then new mortgage financing is the only solution. You can either:
- Refinance your first mortgage to a higher amount with a new lender, or
- You can leave your first mortgage in place and borrow money from a private lender as a second mortgage.
Please note: you will have no success asking your bank for a Home Equity Line of Credit (HELOC) I have never seen a bank grant a HELOC in these circumstances.
We analyse both approaches and show you the outcome with both. We will recommend the approach with the biggest upside potential and lowest costs, taking into account several factors including:
- The maturity date and terms of your current first mortgage.
- The potential cost to break your current first mortgage.
- The overall costs associated with both approaches. Both today and over the next few years as you complete your recovery and rehabilitation.
If we recommend a private second mortgage, we will always have a plan to combine your two mortgages into one in the future. Private lenders call this your “exit strategy”, and it is always of great interest to them, as it should be to you.
That is step one of your journey. After we arrange your new mortgage financing, we will guide you all the way back to a high credit score and the world of “A lenders” as soon as is possible for your circumstances.
How does Mortgage Refinancing Work?
Anytime you want to refinance your mortgage, you need sufficient equity to do so. Your plan is to arrange a new larger mortgage with a different lender, and to repay the mortgage you have now from the new mortgage proceeds. The increased loan amount can be used to pay off your consumer proposal and any other matters which need attending to.
Some alternative lenders are perfectly fine to help you do so. Just like with your current mortgage, an alternative lender will look at all critical aspects of your personal finances – your income and employment, the equity in your home, and your personal credit history. They will also want to understand what led you to file a consumer proposal, and to satisfy themselves that the past is truly in the past.
All these factors combine to determine how large a mortgage the new lender will grant you, and on what terms. The mortgage interest rates are typically higher than those of “A lenders”, and you will be charged a lender fee which is deducted from the mortgage proceeds.
That said, with 30 year amortization periods readily available, our clients find their overall monthly mortgage and debt repayment amount goes down significantly!
There is so much to explain about refinancing of mortgages that I felt it warrants an FAQ page all on its own. At this page we have listed many of the questions that come up as we help our own clients refinance their home mortgages. Real Canadians with real issues.
What is a Private Second Mortgage?
Just like a Home Equity Line of Credit (HELOC), second mortgage is a loan against the equity of your home. Your total loan amount available depends on the equity you have in your home, and your home equity is the value of your house minus all the debts you have against your home.
If a second mortgage makes sense for you, it is because you are not eligible for a HELOC. Perhaps your credit score is too low, or perhaps you have recently been involved in a consumer proposal or bankruptcy.
Second mortgages are highly advantageous to clients looking to pay off multiple debts or who need cash immediately.
With a second mortgage, we leave your first mortgage in place and source additional money from a completely different lender.
How You Could Benefit from a Second Mortgage:
- If your current mortgage is locked-in at a low-interest rate, taking out a second mortgage might be a better choice than re-financing your home due to penalties and fees.
- Repayment terms are more flexible than most other financing options. In fact, most of the time they can be set up with interest only payments, which can help your cash flow immensely.
- Paying off a consumer proposal, home renovations, CRA debt, or perhaps your children’s post- secondary education are a few reasons why you might need it.
- Qualifying for a second mortgage is based more on home equity than credit and income.
Real Life Success Story – Second Mortgage
Earlier this year Cindy and Miles Baird were in distress over their upcoming mortgage renewal.
Although their big bank mortgage was in good standing, the bank had already told them they would not renew, because Cindy was currently in a consumer proposal, and the bank had been dinged as a major creditor.
I could see lots of equity in their home, so I was sure we could place them with an alternative lender by the mortgage renewal date, provided of course they paid off their consumer proposal early.
At that time, their credit scores were in the mid to high 500’s. They also were maxed out on some consumer debt. They wanted to take action then and there.
So we arranged a $75,000 private second mortgage. This paid off the consumer proposal completely; paid off their unsecured debts; and also freed up money to do some long overdue home renovations.
It also actually improved their cash flow. At the time, the CP payment was $400 monthly, and the minimum payment on their credit cards was $480. With the new private second mortgage, their monthly expenses went down immediately by almost $300.
This also allowed us time to begin rebuilding their credit scores over the next few months. With a month to go before their mortgage renewal date, Cindy was up to 648, and her husband to 633.
Now the task was to find a lender who would take on their existing first mortgage ($383,000), their second mortgage of $75,000 and also an extra $27,000 or so to continue the home renovations.
Whereas no big bank would touch this mortgage application, several alternative lenders were anxious to win their business! We settled with XMC Mortgage Corporation, who offered a two year mortgage for $485,000 at a rate of only 3.79%.
This is a huge win – they will save almost $500 more each month AND have the $27,000 extra in the bank.
The Bairds are very happy and relieved to know all their debt woes are now behind them AND their home renovation project will be totally completed.
They will follow through with the credit history rebuild program we designed for them and in two years when this mortgage matures they will be back in the world of “A lenders” and best rates possible. This could not have happened if they had not taken the initiative to pay off the consumer proposal early.
Real Life Success Story – Mortgage Refinance
Recently a client asked me if there is any way he could use his home equity to accelerate the repayment of his consumer proposal. He wants to pay off his consumer proposal early, ahead of schedule.
He makes a pretty decent income, and he is a homeowner. As a result, his consumer proposal payment is over $1,190 per month, which is definitely on the high side; and there are still two years’ payments remaining on his proposal. He also has a monthly car payment of $460.
Gerald figured he could improve his monthly cash flow considerably if he could pay off these two debts and include them in a new mortgage – even if the interest rate is higher than his current mortgage.
In a situation like this, no major chartered bank would touch this mortgage transaction. This is a classic situation for alternative lenders.
To make the deal work, we needed the lender to be willing to refinance his home up to 80% of its current value. All the lenders we approached were willing to refinance up to 75% LTV, but Equity Financial Trust (EFT) offered 80%, with a thirty year amortization period, and that meant we could actually pull this off!
His new mortgage is a one year mortgage, because in one year we will test the market to see if he could switch to a credit union at a much lower rate at that time. If not, we will renew for a second year. I am confident he will be accepted within two years as long as he follows the credit history rebuild program we have designed for him.
The bottom line:
Gerald will reduce his monthly debt payments by $1,650, while his monthly mortgage payment only increased by $382!
If you are thinking of paying off your consumer proposal by tapping into your home equity, please contact us and we will walk you through all your alternatives.