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Consolidation Of Debt: Not Always An Ideal Solution

Why Consolidating Your Unsecured Debt into your Mortgage or a Secured Line of Credit May Not Be a Good Idea

These are challenging times for us all. Not only is the COVID-19 pandemic continuing to cause anxiety and worry for most of us, but there are also significant financial issues occurring because of the virus’ impact on our workforce and our economy. The unemployment rate in Canada has improved slightly over the past few months but remains damaged, and household debt loads continue to increase, despite actions by the Canadian government to provide support and relief.

With many Canadian homeowners struggling to pay down their debts, some Canadian banks have begun offering customers a secured line of credit (or the option to refinance their mortgage) at a reduced interest rate. This usually means the bank offers to roll a person’s unsecured debts into their mortgage. These options are often presented to those with higher unsecured debt and house equity.

This situation seems like it could be beneficial. Secured lines of credit and mortgages typically have lower interest rates than unsecured debts like credit card debt. However, much like with every financial decision, this is not a “one size fits all” solution. Depending on your situation, accepting the bank’s option and taking this step may not be the ideal solution for you.

What Rolling Unsecured Debt into a Mortgage or Secured Line of Credit May Do

Before you decide to combine your unsecured debt with a secured line or credit or your mortgage, it is important to consider the impact of such a decision. By rolling your debts into your mortgage, you automatically decrease the amount of equity you have in your home (since you are increasing the amount you owe on your mortgage). If you do this, you may still be able to afford the monthly payments, but if house prices were to fall, you could end up owing more money on your mortgage than your house is worth. This is called “being underwater.”  That would make it impossible for you to sell your home without losing a lot of money including mortgage prepayment penalties.

Even more important to ensuring you keep all your options open to resolving your debt pressures, secured debt such as mortgages or secured lines of credit cannot be included in a bankruptcy or consumer proposal filing. While starting either of these processes may not be what you had planned to do, in these challenging economic times, these options are often the best way to resolve debt problems.

It is important to make financial decisions that are right for your unique circumstances. Every person’s situation is a bit different. In some cases, refinancing could be the ideal path to take. However, for others, refinancing could result in a situation where you will still have to file a consumer proposal while trying to pay off your outstanding mortgage debt. This scenario could be much more costly compared to filing a consumer proposal alone. In addition, if a person refinances and discovers they cannot afford the higher secured debt payments, they could lose their home and may have to file for bankruptcy to protect themselves from their creditors.

If your bank is encouraging you to refinance and roll your unsecured debts into your mortgage or a secured line of credit, you should proceed cautiously and ask a lot of questions. What may be good for the bank may not be good for you, especially in these uncertain times.  Refinancing could start you down a path that ends with you losing your home, having to file bankruptcy, or in other financial trouble.

If you are unsure how to proceed, and are wondering if refinancing is the right solution, reach out to one of Farber’s licensed professionals   Just CLICK ON THE FREE CONSULTATION BUTTON, below, or give us a telephone call. We are here to listen – and to explain all your options to you.