If you’re a homeowner who wants to get on top of their debts in today’s market, we generally offer 3 solutions.
This morning, Doug Hoyes and Ted Michalos posted a two-minute tweet about some homeowners having difficulty using a private lender to solve their debt problems.
In our business, we have a few approaches for you to take to control your debt problems.
Sometimes your first move is going to a trustee who tells you, “you are richer than you think.” Most of the time it would be best if you dealt with a mortgage broker rather than an insolvency trustee, as you are not, in fact, insolvent.
A mortgage broker will assess your situation and determine the best course of action. A refinance could be unwise by breaking a damn good low-rate mortgage with years of term left. Maybe a new lender will not qualify you with stress test rates north of 8% these days.
We suggest you have three options:
1. Sell your home, pay everything off, sit on the sidelines and come back to the real estate market closer to the bottom when your credit score or other negative factors have improved.
In the current market, this is a good approach because you may well end up able to come back in at a lower price, from a position of strength somewhere down the road.
However, almost all homeowners go tone-deaf when we encourage them to sell.
2. Your next choice is a private second mortgage.
Cash flow will improve, no doubt, but the interest rates are high and getting higher. We have done a few recently at 9.99% to 12.99%, and occasionally, there may not be a clear exit strategy involving mortgage financing – for the reasons cited in Doug’s video.
Someone with $100,000 in credit card debt has a minimum monthly payment of up to $3,000. (3% of the balance)
But an interest only $100,000 mortgage at 12% per annum has a monthly payment of “only” $1,000.
3. The third choice is to go (back) to a trustee and offer to settle for one hundred cents on the dollar. Perhaps even more.
At least you gain interest rate relief; your monthly payments decrease markedly; and within no more than five years, your debts will be all paid off, assuming you can keep things together till then.
With a consumer proposal, cash flow is improved, but still, this is not ideal. That $100,000 in credit card debt would be $1,667 per month for five years.
However, a trustee may get creative and agree perhaps to a monthly payment of $667 and a lump sum payment of $60,000 after five years. That is more like it!
A lot of good things can evolve over five years. It gives you the best cash flow impact and allows them to build up equity while paying down the proposal and mortgage balances.
And that sort of approach can get even more creative.
At any time during the life of the proposal, it can be paid off in full or in part with no penalties.
If there is a sensible mortgage solution in a few years, or if you do sell your home you can knock out the proposal and start moving forward.
We have helped many people buy or refinance a home even though a consumer proposal is on their record.
And we are often asked how long do you have to wait after filing a consumer proposal before buying a home.
Ross Taylor Mortgages is uniquely positioned to help stressed-out homeowners with too many debts or cash flow problems. Not only are we award-winning mortgage agents, but Ross Taylor is also a registered insolvency counselor!